Performance Perspectives Blog

To how many decimal places?

by | Feb 11, 2010

I’m looking at a client report (fortunately not one that they would give to a client) that shows, for example, the return 41.29959483 percent. Such precision! To eight decimal places! I’m impressed. Well, actually I’m not.

Actually, this is a waste of ink, yes? One can’t confuse precision with accuracy. What possible value would anyone have in a number to this level of detail? As if it’s actually right? The report is produced from a software system: why would a vendor have this information default to such a value? Seems odd to me.

I was on a flight recently and the pilot announced that the flight would last 2 hours, 52 minutes, and 40 seconds. Actually, he said it would last “approximately” that long. Approximately? To paraphrase Dorothy from Jerry Maguire, you had me at 2 hours, 52 minutes; and, you could have rounded to 50 minutes (I won’t be running my stopwatch to validate your accuracy). You could have probably just said “approximately three hours.” But no doubt there are some folks that like to hear flight times to such precision and perhaps even believe they’re accurate.

Even returns with three decimal places seem a bit ridiculous, except where excess returns (and returns in general) are so small that we need this additional precision or show zeroes.

Don’t confuse precision with accuracy: they’re two different things. We should strive for accuracy but recognize that even that isn’t always as achievable as we’d like. There’s a lot of noise out there that makes 8-decimal place returns a joke. 

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