Allowing statistics to mislead you is detrimental

by Ashvini on May 5, 2011 · 4 comments

in Business

Statistics are presumed to be fundamental in nature, same as immutable laws of mathematics. For e.g. in a right angles triangle hypotenuse squared is the sum of sides squared always.

Statistics can lead to wrong conclusion

Statistics are important because they allow us to understand the world around us. They help us to find patterns where things repeat themselves. They are analyzed backwards(in retrospective) to determine the causes. We create marketing campaigns, election rallies, public policies etc based on the conclusions inferred from these statistics.

Interpretation of statistics has become so powerful that it actually has spawned a industry in finance which analyzes past trends (of stock charts) and gives suggestions for buying stocks that may go up in future, even as it adds at the bottom of every report. “Past performance is not the guarantee for future success”.

We do have our own interpretations of statistics. Let us say,I want to start a business in a certain area where 90% of people have failed. If I ask someone who knows about it, his first response probably would be “don’t do it”. Why? Because there is 90% failure rate. Here the statistics have been used for convenience and support of personal beliefs that business will fail. It also supports the argument why should someone never venture into that area.

When I was looking for VC funding for my own venture, it was advised to me that it was unworkable. Many people are trying to enter this business and it will become crowded. There were so many assumptions( and stats to support) that it was impossible to convince VC that I had a solid workable plan. They had stats while I had only a promise.

Trends are also another kind of statistics interpretation. People run after trends thinking that trends are something they should bet on. Trends are speculative and often die after certain point in time but they have power of data with them when they are in vogue. It is very difficult to counter argue with a trend because there are so many voices “for” the trend that any reasonable opinion against them get drowned.

Politically trends and deliberately false interpretation of statistics  have sometimes lead to wars and troubles . In business world, relying on trend( dot com trend for example) had so many companies losing business and money . Now the trend is about social media and everyone wants to jump on the bandwagon.  Relying just on trend and statistics sometimes is harmful because it takes us away from our core competencies and into relatively unknown areas. While it is necessary to take risks to gain business, running after every trend indicates that a business has no goal setting done.

So should we not rely on statistics? In my opinion, statistics are useful tools. If you are building a house in an area that is under rain 350 out of 365 days, that information is useful to you. Not because you should find another place to build the house but to make sure that you take adequate precautions to protect yourself and your house from rain.

If you are in a business where others have failed. Why did people fail in that business? A statistical study should provide a reason( a non existing market, high costs etc).

If you are planning a government policy for helping elderly,to know how much % of total population is elderly, is important. However, your policy features should not be governed by that number.

So here you go. Stats are good when they are used to determine risks in a projects, reasons of failure and establishing cause – effect analysis.

Will the risks happen again? Who knows? They might not happen at all or happen in full. Stats will help you to be prepared for them when they do.

Stats for drawing subjective conclusions such as guessing the price of stock, success in a business, political environment, personal successes is equal to wrong guess. The probability of what you have deduced happening is only 50%(either or not). I hope you get the point.

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Sonia May 16, 2011 at 8:57 pm

I remember starting a gift business years ago based on the fact that it was the “trend” at the moment. You are right about it dying after a “minute” and before I knew it everyone and their momma was selling the same stuff. I swore I never wanted to put myself in that situation ever again. So when I started my blog, I was happy with the fact that I could create my own business, brand and destiny in how I wanted.

Statistics I feel works for everyone, but how you use it is a whole complete different story all together. I use Google Statistics to measure what posts work and what doesn’t , where they came from and how they got there and thats it! I don’t want to spend too much time on it because it can drive you crazy. Now, if you sell a specific “product”, it will matter much more intensely because they measure this by sales. At the end of the day, if people put their focus back on their business and leave the numbers game out of it, they would be more productive.

Very good post Ashvini!

Ashvini Kumar Saxena May 17, 2011 at 11:27 am

Hi Sonia,
People use statistics as if it is a magic wand. This is true especially in stock market where past is used as a parameter to calculate future and it fails all the time.

It is great to learn from your personal experience

Aswani May 6, 2011 at 9:11 am

Thumbs up for such an outstanding article. Everything said above makes sense and in the end, I can only say…One should avoid being carried away with such statistics everytime. No doubt, its important but finally you should make use of your common sense and do some self-analysis before reaching to any conclusion.

Anonymous May 6, 2011 at 9:28 am

Glad you liked it :)))

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