We are educated but we aren’t necessarily numerate. Innumeracy plagues many of our decisions and renders many of them sub optimal; not necessarily bad but sub optimal.
We tend to ignore base rates and believe that statistics do not apply to our lives. Our hind brains constantly tell us that our specific situation is unique, data on the other hand tells us that there is nothing unique or special about most of our life. Higher the objectivity in the analysis, the better is the quality of decision making.
As usual, a few examples work better at drilling home concepts.
Some basic and harmless looking data points as of 2019
- Number of individual tax payers in India is ~5.52 Cr
- Number of individual tax payers with gross income more than INR 25 lakh is ~10.5 lakh
- Average CEO salary for the Top 250 companies in India ~4.5 Cr
Just extrapolating from these basic numbers, a number of inferences can be drawn.
- The population of India doesn’t matter much for most businesses, you will never be able to reach the bulk of the population anyway. If you are selling a premium product/service, you can at best appeal to 2-3% of the population of the country. Per capita numbers for the most part do not matter, unless you are talking about essential goods and services like FMCG, telecom, education, basic banking & payment services. If you are trying to run a business in a segment that is not universally appealing, you are unlikely to get the valuation of a business that has universal appeal; even if that business is inferior on other parameters. The bulk of your business valuation will be driven off this point, greater addressable market size and scale lead to higher valuation. Niches can be profitable but they rarely make the front page of a business paper, they are unlikely to make you a billionaire.
- The average Indian CEO is 50+ years old; there can only be one CEO in an organization, no matter how huge the business is. If you aim to be the CEO of a large organization, the base rate of success is going to be very low by design. No matter how smart you are, no matter how hard working you are, the probability of you becoming CEO at a large organization is miniscule. If you think becoming a CEO is what can make you happy, you are setting yourself up for near certain unhappiness.
- The average salary for CEOs in India is skewed due to a few outliers who rake in the money, CEOs at the best paying companies make more than INR 15 Cr. Once you discount these outliers the average number is likely to be closer to 3.5 Cr. If your goal is to be worth INR 25 Cr by the time you are 45 years old, you are better off choosing a different career path than aiming to be CEO. Take your chances working for a well-funded startup, run your own damn startup or try to become a good investor who can compound at 25% p.a. Don’t waste your time slogging away at HDFC Bank or at TCS. Those aren’t bad places to get started but don’t expect to stay there and be valued for your loyalty and relationship equity. More on this here
- If you are a well-educated individual looking for an equally well-educated spouse, you have the best chance of that happening while you are still studying on campus. Try calculating the probability of finding someone who makes INR 35+ lakh at the age of 35, is decent looking, single and available. You are staring at a serious numerical disadvantage that will only get worse with time.
And many more.
See how each one of these impacts a very important aspect of life like career, relationships & money? By being more numerate, we can improve the quality of decisions we take on a daily basis, but that is boring stuff. By nature, human beings do not like to spend too much time thinking, we instead want to spend our time living well and feeling good emotions. But what feels good isn’t necessarily the best thing for us in the long run. In fact, most things that are good for us in the long run call for calibration, restraint and deliberate thought.
We rarely do critical thinking based on widely available and simple looking data points.
We spend most of our lives obsessing over qualitative factors that appear more relevant to our situation, but they don’t impact base rates all that much.
Very few people appreciate the difference between a 50% probability and a 70% probability. Leaving the outcomes to fate and to divine intervention is the easier thing to do, rather than to think deeply about how to incrementally improve the probability of success.
Those who become successful based on a deliberate and conscious plan also stay successful. While those who attain success based on chance don’t always remain successful, they are more likely to fritter away their good luck one way or the other. Don’t believe me? Look at all the actors and music stars who became very successful early on, most of them have fallen by the wayside and haven’t done much since.
In investing parlance, we call this “process over outcomes”. The best investors and traders have a process that takes precedence over all other things.
At the very core, emotions are rooted in logic. What makes you feel happy today are things that resulted in good outcomes for the average human being in an evolutionary sense. That sense of fear you feel when you see a huge, intimidating unknown person approach you on the road? It is because the possible negative outcome of this is imprinted into our DNA, this looks like an emotional response when seen superficially but it is rooted in solid evolutionary logic.
Aim to be numerate in decision making for the next year or do, see if that makes a difference to your life. If done well, the value addition should be significant and obvious.