notice how he's presenting a "micro analysis"Regular readers of this blog know that I’m a huge fan of data. I like economic data, established facts, and even plausible theories. But there’s a mistake made by people in all walks of life, in all professions, and there are no exceptions: we misinterpret data.

Sometimes we misinterpret data because we are being mislead. This could be from a co-worker, or a corporation trying to hide their financial troubles. Sometimes we misinterpret data because we see only what we want to see in it. This occurs all too frequently in economics. A pessimistic pundit would see a report on income saying wages rose for the 3rd straight month as “well they’re still down 10% from their peak 3 years ago”. He is not wrong (the data I just gave is made up by the way), he’s merely pointing out a fact. If he says this is a sign we are not out of the woods he is correct. If he says we’re going to get worse he’s misinterpreting the data.

But most times we misinterpret data because we aren’t really thinking about what the data says or where it came from. I wish I could take credit for this post, but people much smarter than me noticed such a problem in all the reports about the American consumer reducing their credit card debt. Michelle Singletary of the Washington Post has been skeptical of such reports that consumers are reducing their credit card balances for some time. And now she has the data to back it up.

Take for example a report issued by the credit bureau TransUnion that said we have reduced our credit card balances to 8 year lows. This is a statement of fact. But if you read the linked article, the writer goes on to make certain assumptions based on that data. Perhaps TransUnion was first to make the assumptions, and then the assumptions were mistaken for facts.

As Singletary points out in her article, it is true credit card balances are being reduced. But why they are being reduced is up for debate. Loan balances of any kind can be reduced in two ways. The first is to pay it down. The second is if the lender writes down the balance. The lender will write down the balance once they believe you can no longer pay off the debt. They may write down a portion, as a part of a negotiated settlement, or write it off completely. When a lender does this, they must take a loss in earnings. This is because they expected to make say $100 on you, but now they’ll only make $20, or $0. This is a contributor to the reduction in balances on credit cards, and Singletary’s article does a convincing job of saying it may be contributing to our reduced debt levels more than people paying down the debt.

Personal finance data aside, it’s the implications of these misinterpretations that concern me most. We live in a world today where there is no shortage of data. Anyone can access thousands of reports on everything from the earnings of a company, to the donations received at non-profits, to an accounting of every dollar spent by the government for free. Throw in private data that may be charged for and we really are in information overload. I’m convinced anyone can find data to support their point of view, and anyone can find data to take the opposite side.

And with millions schmucks like me having access to this data and a medium to broadcast it to the world, we could be causing more harm than good.

This is why I support having a healthy dose of skepticism in everything. That includes me. When a politician, pundit, or amateur blogger starts talking about “data”, ask yourself 3 questions. First, where did the data come from? Second, what exactly does the data say? And finally, what does that data really mean?

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categories: economics, personal finance