## Friday, August 24, 2012

### Just because the return or risk formula seems to make sense doesn't mean it's valid

The Spaulding Group offers Operational Reviews and Software Certifications, both of which expose us to formulas that firms put into use. Sometimes, they are variations of formulas that have been around for years; but occasionally, they're brand new; ones the clients developed themselves. Over the years we have encountered a variety of "home grown" methods, which are usually invalid.

An Abbott & Costello routine serves as a great example of just because you can make it look like it makes sense, doesn't mean it does.

The scene: they're in the Navy, and Costello is a baker; he explains that he made 28 donuts for the officers; there are seven officers and he has just enough so that each will get 13 donuts (a "baker's dozen").

You read it right: 28 donuts will be enough so that each of the seven officers will get 13 donuts. How can this be? Well let's see (and I'll do my best to explain, though the video is better):

1) Division: 28 ÷ 7 = 13. How? Seven cannot go into two, so we put that aside. Seven goes into eight once right? And so we divide the seven into eight and have one left over. We now bring over the two, giving us 21. Seven goes into 21 three times, so our answer is 13.

2) Multiplication: 7 x 13 = 28. How? Multiply seven times 3 and we get 21. Seven times one is seven. Add seven to 21 and we get 28!

3) Addition: 13 + 13 + 13 + 13 + 13 + 13 + 13 = 28. Begin by adding the 3s: 3, 6, 9, 12, 15, 18, 21; and then add the ones (22, 23, 24, 25, 26, 27, 28).

Clearly, this creative arithmetic is wrong; however, there is no doubt that many who, when presented with it, would be inclined to think that it makes sense and that Costello must be correct.

If you think this is silly, you should see some of the methods that have been given to us to measure returns!

Hopefully you'll agree that this was a "fun" way to end the week. Care to see "the boys" in action? You can, on YouTube! While perhaps not as famous as their "who's on first" routine, it's still enjoyable.

p.s., Ma & Pa Kettle do a similar trick showing how five times 14 equals 28! This adds even more credibility to this creative math.