Most people are able to manage their everyday calculating tasks, including those related to money. “This item I need costs $80,” “my salary is $3,000 a month,” and so on. But as the numbers grow larger and larger, one’s perceptions and responses become more and more emotional. For example, think about making a $5 bet at the casino. Now think about making a $500 bet. Now $5,000. What would be happening to your emotions (and your ability to think rationally) as the size of your bets – and your potential winnings or losses – rose higher and higher?
I have to tell you, though, when ordinary people think about huge sums like 5 million dollars and 5 billion dollars, the amounts seem similar. Both are unimaginably large sums of money. Few people would realize (unless you showed them) that 5 billion dollars aren’t just 100 times bigger than 5 million; it is 1,000 times more.
It is hard for most people (those not accustomed to it) to be rational when talking about or working with big numbers. That is why a report of a profit or loss of millions of dollars can sound like an enormous success or disastrous failure, when those directly involved don’t think of it as very significant. Instead, they interpret such results in the context of the size of the investments that led to those results, or they look at the profits or losses from a longer time perspective.
A report of a single day’s Dow Jones index number (in dollars), or the number of dollars our country’s GDP rose or fell in a month, do not provide us with much useful information or knowledge. The only way to get a clear picture and be able to think rationally about such large-scale financial events (or other social questions) is to use percentages. Thinking with percentages makes it far easier for us to rationally compare things of different sizes or changes over time.
In general, there are two types of people when it comes to this subject of thinking in percentages: those who have trouble doing it, and those who do it easily and just love it. The first group experiences problems in comparing data, and the second group often takes advantage of that fact. Interestingly, most rich people are quite good at dealing with percentages. It’s not that they are better at calculating them – it’s just a matter of mindset.
Some (most?) journalists, politicians and salespeople manipulate us by forcing us to compare (or comparing for us, in deceptive ways) things that aren’t really comparable. (One way they do this is using those “average monsters” we talked about earlier.)
People who are good at thinking with percentages do tend to have their own problems. Many of them get a sort of “side-effect disease” of thinking linearly, which leads to making poor decisions, and to feelings of dissatisfaction and depression.
That all may be interesting, but how can you make use of thinking in percentages in your wealth management system? Here are some ratios you may find useful in determining your success:
- Return on Wealth = Profit for a period / Accumulated Wealth
- Return on Income = Profit for a period / Period Income
A question for you: Are you RATIOnal enough?