Statistics in Finance

Answer 1

Years ago when I was working for an investment firm I decided to do some statistical analysis of our client accounts by their dollar value. I didn’t know why I was doing it or where it would lead me but I just enjoyed playing with numbers and learning about statistics. You might expect a degree of variation between account values in the books of an investment firm. What I found went far beyond a degree of variation. In fact the distribution of the account values was skewed by a large measure by the accounts of a single client, a government body for which we managed a substantial bond portfolio.

Once I saw the skewed curve that stemmed from the initial analysis, I calculated what our fees for assets under management (commonly abbreviated to AUM) would look like if this single client decided to take its business elsewhere. The resulting figure was a very large percentage of our total AUM fees collected in the prior year. In short, losing this single client represented a huge risk to our organization, one that we couldn’t weather without significant restructuring.

I tried to raise the alarm but no one was interested in hearing my story. I left shortly after that. I felt a little vindicated a year and a half later when I got a call from my former boss. She’d been laid off, along with several others because, you guessed it, we lost the business of that one single client.

Since then I’ve never underestimated the value of using statistical analysis in business or in Personal Finance applications. I am still learning new statistical techniques for analysis and I find that I really enjoy the minute insights that such analysis can yield. I highly recommend you learn about statistics, at least a little bit, if you’re to successfully manage your finances. After all, H.G. Wells the famous author and futurist once said, "Statistical thinking will one day be as necessary for efficient citizenship as the ability to read and write."