is the on-line home of business consultant and author Phil Green

Reinhart and Rogoff story shows how important it is to check your indicators

This month two academic researchers showed that there were errors in the calculations behind the claim by economists Carmen Reinhart and Kenneth Rogoff that the relationship between government debt and real GDP growth is weak for debt/GDP ratios below a threshold of 90 percent of GDP. Above 90 percent, median growth rates fall by one [...]

Top ten reasons for reading misLeading Indicators: How to Reliably Measure your Business

There are many books that tell you what to measure to succeed in a business strategy or to improve business performance. Ideas on what to measure may indeed be very useful. But these ideas won’t help you, and may even be harmful, if you do not know whether what you are measuring is misleading you.  [...]

How Western Electric rules mislead in statistical process control

The statistical model behind control charts for in-control processes is based on the assumption a Gaussian process with no autocorrelation (i.e. independent) with a constant mean and constant variance: in other words a white noise process. The various Western Electric rules try to find patterns that are not white noise, and thus show that the [...]

The Department of Justice will have a tough time proving that Standard and Poors “inflated” its bond ratings.

The US Department of Justice has launched a civil law suit against the rating agency Standard & Poors, alleging “S&P issued inflated ratings that misrepresented the securities’ true credit risks” and that “S&P falsely represented that its ratings were objective, independent, and uninfluenced by S&P’s relationships with investment banks when, in actuality, S&P’s desire for [...]

The bond trader’s fallacy

A few weeks ago one of us was sitting beside a retired bond trader at a luncheon. Both  interlocutors being interested in probability and its applications in business, there ensued a disagreement about whether in a sequence of coin flips the flips were independent. The bond trader argued that anyone who believed they were not [...]

Lance Armstrong doping case and bond defaults show challenges of probabilistic reasoning

In an earlier blog post (here) we wrote that, given the evidence available to us at the time, Lance Armstrong was probably not guilty of doping. The main line of our argument was that hundreds of doping tests from certified laboratories using accepted procedures had not found dope.  We restricted the evidence to this, in the [...]

The Curse of Kelvin

“The mental health effects of any given disaster are related to the intensity of the exposure of the event. Sustaining personal injury and experiencing the injury or death of a loved one in the disaster are particularly potent predictors of psychological impairment.” The research paper from which the above quote was taken was published shortly [...]

Core earnings: Is new metric misleading?

Brian Milner, a journalist at the Globe and Mail’s Report on Business, picked up on our blog post on core earnings and cited it in this article this morning.

Core earnings don’t get to the heart of profitability

A couple of weeks ago Manulife Financial, a large Canadian insurance company, introduced a new metric called “core earnings.” They reported a net loss of $227 million in the third quarter, but $556 million in core earnings. The problem with core earnings as an indicator is that it attempts to determine the revenue from the [...]

The biggest storm? That’s hot air.

After every big storm there are always attempts to rank it to see how it compares to other biggies. That certainly happened with this week’s “Frankenstorm” Sandy (for example here and here). There are so many ways to rank storms that there will likely be some way every major storm will earn an impressive rank. [...]

Why it is so easy to be misled by polls

Pat Caddell, the former adviser to President Jimmy Carter, accused the mainstream media (here) of using polls they know are inaccurate as weapons against Republicans. “When I have polls that have the preference of Democrats over Republicans higher than it was in 2008, which was a peak Democratic year, I know I am dealing with [...]

Small mistakes can make indicators very misleading

Yesterday my bicycle computer told me I was riding through the park at nearly 88 kmh (54mph). If only. Small mistakes can make indicators very misleading.  A chemical plant once discovered a simple error in a laboratory procedure that gave them slightly high readings of water concentration in samples of their final product taken from [...]

Rare events

A lecture announcement from the Department of Mathematics and Statistics at Dalhousie University said that “this year our Distinguished Speaker is Professor Srinivasa Varadhan,” who will give a talk on RARE EVENTS on October 11. The abstract of the talk says that “we often have to make a quantitative assessment how rare event (sic) really [...]

Armstrong Affair shows USADA uninfluenced by measurement

The US Anti-Doping Agency says it has “overwhelming proof” seven-time Tour-de-France winner Lance Armstrong was cheating by doping himself with performance-enhancing substances. What is the evidence? Armstrong was tested for drugs perhaps hundreds of times during his cycling career.  Every single test pronounced him clean. That is strong evidence against doping. According to the USADA, [...]

Obama’s chained inaccuracy

(This article by Philip Green and George Gabor first appeared as a special to the Financial Post on August 16 2012). The Obama administration is considering adopting the “chained consumer price index,” as the principal measure of inflation upon which increases in payments to such things as Social Security would be tied. The Chained-CPI is [...]

What measuring Olympic athletic performance can teach business

How should one measure the performance of countries at producing Olympic medal winners, and of the Olympic athletes themselves?  Some members of the press are having some fun answering that question—and there are some lessons for business too. The National Post played around with various ways of adding up the medal count to compare countries. [...]

Dillusions of importance

Economist Fredrich Hayek, in his 1972 Nobel lecture, criticised what he called the “scientistic” approach to economics. His criticism applies today to those who over-emphasize the importance of measurement in management. He said:  Unlike the position that exists in the physical sciences, in economics and other disciplines that deal with essentially complex phenomena, the aspects [...]

Investors beware: mining resource estimation methods give inconsistent results

After the Bre-X scandal in 1996, when fake measurements of gold wiped out billions of dollars in shareholder value of the Canadian mining company, the mining industry developed new standards for measuring mineral resources. While they are a vast improvement, the words and methods the industry uses to describe resources still leave room for the [...]

This time it’s different: stock market indicators

There is no shortage of indicators in the stock market. And anyone who can find reliable leading indicators that give reasonable predictions of what the markets are going to do in the future will quickly get very rich. Many people try—and fail. That does not mean there is necessarily anything wrong with the indicators themselves. [...]

How business measurement clichés mislead

You get what you measure What you measure is what you get If you don’t measure it, you can’t manage it Tell me how I’m going to be measured and I’ll tell you how I’ll perform You cannot improve what you can’t measure Garbage in, garbage out If you don’t measure it, it’s just a [...]