Wednesday, October 27, 1999

The Other Bottom Line

By lkutner

Glance at just about any daily stock price chart in a newspaper, on television or on the Web, and you'll see high drama. Ooh, there was a spike the size of Mt. McKinley back in April. The price is near the top of the frame. Ouch, it really plummeted in September. It's two-thirds of the way toward the bottom.

Unfortunately, these charts lie. Sure, the numbers are accurate. I'm sure the chart makers would defend themselves with the zeal of a political spin-doctor. The problem, as with so many things in business, is the bottom line.

No, not the financial bottom line but the graphic one. Almost all financial charts have a Y axis (the price) that stops at a number higher than zero. It's known as "truncating the scale," and is usually done to make small changes more visible. In other words, it exaggerates.

It also messes up how we interpret information. When we look at a chart of anything, we tend to subconsciously measure the area under the curve to give us some perspective on what's going on. If the Dow drops from 10,200 to 10,100 and the bottom of the chart is 10,050, it looks like the sky is falling. If the chart were the same size but had its bottom at zero, there's hardly a blip. That's the real perspective. (If you chart stocks on Quicken, you can flip back and forth between truncated and non-truncated scales to see the dramatic effect.)

So the next time you see a stock chart -- even the ones on the Fool -- take a hard look at the bottom line. And just for fun, figure out where the bottom of that chart would be if it went all the way down to zero.

 Recent Fribble Headlines
  12/26/00  The Do Donate Fribble
  12/22/00  The Don't Donate Fribble
  12/20/00  Ode to Mom at Christmas
  12/18/00  More to Life Than Net Worth
  12/15/00  Seasons in Investing
Fribble Archives »  

Have a similar tale?
Talk about it in the Fribble Message Folder!