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Milestone Figures Grab Attention, but Their Impact Is Hazy

Great article in the WSJ on why some numbers matter: because we think they do which makes their importance self-fulfilling. Round numbers catch people’s attention and also influence trading decisions.

Arbitrary milestones pervade economics, finance and everyday matters. Some carry more meaning than others: Foreign-exchange markets can rattle national confidence when one country’s paper money threatens to drop below parity with a rival’s, which is a meaningful threshold because it is felt in the portfolios of those swapping currencies. It’s less clear why double-digit inflation and unemployment should carry more political weight than rates just less than 10%, particularly given the controversies about how the numbers are calculated.

The milestones are the result of our brains’ attempts to impose order and assign categories to numbers that vary continuously. “You have to be able to draw some emotion or feeling from information in order to understand it,” says Paul Slovic, professor of psychology at the University of Oregon.  
Some arbitrary cutoffs are needed in order to make business decisions. The worst BBB- rated bond is hardly better than the best BB+ rated one, yet the former is investment grade and the latter junk.

Further diminishing their importance, milestones often don’t change when underlying conditions do. For example, it’s a lot harder for an album to sell one million copies than before music was sold and swapped online, but that’s still the criterion for platinum status. In baseball, some Hall of Fame voters treat 500 home runs and 300 wins as thresholds for sluggers and pitchers, respectively, even though homers have gotten easier to come by, and wins harder.

Full article
H/T Abnormal returns.

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