This afternoon, I did the Stand Up with Pete Dominick on POTUS Sirius XM with my buddy, Pete.

One of the questions that popped up was the road signs that accompanied the highway and bridge work of the American Reinvestment and Recovery Act. Apparently, these cost $20 million of the $785 billion dollars spent on that stimulus.

I told listeners it was disingenuous (I believe I used the words “idiotic”) to discuss such a piddly sum relative to a $14 trillion economy, and that we didn’t have time to go over such meaningless (in government terms) sum.

There are two things I wish I had time to discuss on the air:

1) Really Big Numbers are hard to comprehend. For obvious reasons, many people have difficulty relating to astronomical numbers. A trillion is beyond comprehension for most folks, even a billion does not compute. But a million dollars is something that is comprehensible.

Hence, someone can easily grok a $20 million expenditure as “large”, but a $14 trillion economy is simply beyond their ability to comprehend.

Clark Taylor put it even more simply on Twitter: Let’s compare the $4Tril to a person’s $50k annual income. $4Tril is to $20Mil as $50,000 is to $1. (UPDATE: To be more precise, its 0.000005% — 25 cents).

That puts it in terms easily understood by anyone.

2) Focus too much on the pennies and you miss the dollars. Ace Greenberg served as CEO of Bear Stearns from 1978 to 1993 and Chairman of the Board from 1985 to 2001. He was notorious for having employees reusing paperclips. (See Memos from the Chairman — its one cent on Amazon).

During the course of his leadership, Bear plowed headlong into securitizing billions of dollars worth of mortgages. They used lots of leverage, had multi-trillion dollar derivative exposure. Eventually, their subprime housing exposure collapsed the firm, and its share price fell from $172 in 2007 to $2 in a sale to JPM on 2008 (eventually raised to $10).
Entrance to the Bear Stearns Tower the morning of the JPM rescue

 

I estimate that the CEO and Chairman of Bear Stearns spent a few 1,000 hours over the course of his career having people reuse paper clips, saving a few $1000 dollars. When Bear collapsed, its market capitalization went from  $25 billion to almost nothing.

That is what happens when you focus on pennies and ignore dollars . . .

Category: Media, Psychology, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

29 Responses to “Missing the Dollars to Pick up Pennies”

  1. verneer says:

    Great point that I, and many others, sometimes lose sight of. Thanks!

  2. King Kong says:

    I often have to get a similar point across myself. Here is a comparison I often use:
    - 1M seconds = 12 days
    - 1B seconds = 32 years
    - 1T seconds = 32,000 years

    Example: paying for the Iraq war at $1/second would take 50,000 – 100,000 years to pay off.

    I don’t agree this is easy for everyone to understand when you put it in terms like this. I find a large number of people still don’t get it.

  3. bergsten says:

    I’ve heard it said (and experienced it myself) that people tend to focus on quantities they have direct experience with. I’ve seen Boards argue over “pennies” but sign off on hundreds of millions with little comment or concern.

    Funnily enough, this screws those attempting to save money because their small amounts are overscruitinized, and screws everybody else because the huge sums are wasted lowering everyone’s morale.

    Except, one would think, for those receiving said tens of millions.

  4. bergsten says:

    “Your comment is awaiting moderation.” Sigh. How quickly they forget.

  5. warren.buffett says:

    Precisely,

    In about 60 years, the world global economy will be 1,000 Trillion Dollars.

    14 Trillion Dollars would be piddly and historians will laugh at our pithy fights.

    Of course, the republicans and tea-baggers will be scaring the shit out of clueless idiots about the US $150 Trillion Debt while enjoying the lifestyle of a current-billionaire…

  6. Vitus Capital says:

    Great BR!

  7. DiggidyDan says:

    I believe this is a rather pervasive personality quirk of those who rise to the ranks of CEO. It seems odd, but the bean counters and the intelligent engineering types seem to get the idea, yet the social, abstract management types have some sort of limited capacity to miss the forest for the trees. They seem to be focusing on too many other things to be able to process, recognize, or give a crap about this aspect of business.

    The human mind is only capable of processing so much. . . perhaps if we limited the scope of such constructions as large governments, corporations and institutions these failings would not be as prevalent. Too big to fail? Too big = fail in my opinion. There is just too much to keep track of at some point. Trust in “leadership” and “communication” are the harbinger of disaster. Ignorance and hubris of man combine once again to put us in our place eventually, and collateral damage is secondary to those who “got theirs” on the way up.

    Apes wearing pants.

  8. James Cameron says:

    > A trillion is beyond comprehension for most folks, even a billion does not compute

    Whence, the US debt held by the public ($11,253,532,918,838)

    1. If stacked in pennies would make the (average) round trip to the moon 2,268 times
    2. If weighed in pennies would be the equivalent of 35,072 Nimitz class aircraft carriers

    unless my math has gone horribly wrong . . .

  9. I went to the post office the other day to figure out what the correct postage for a large envelop should cost. The teller had everywhere from a buck ten to a buck and a half depending on how much I put it in. I said heck give me a couple sheets of buck and a half stamps at one mailing a week its not worth the hassle to figure out.
    I’ve often wandered if Bill Gates dropped some change on the ground and it took him a full minute to pick it up, how much would it have to be before it made economic sense for him to bother?

  10. kwabena says:

    Dang, BR – most days I’m with you, and the general gist of this is pretty spot on, but…

    1. Why are you comparing spending to total gdp? Doesn’t seem appropriate. Total budget outlays ($4T) is a little more appropriate, but it seems like it might make more sense to compare the $20m to total infrastructure spending in the stimulus package, which must be lower than both.
    2. $4T : $20m is ~200,000:1, no? Someone got their math wrong on Twitter – and lest you lambast me for sweating the small stuff, I believe that Knight Capital probably wishes some of their programmers had sweated the small stuff just a little more.
    3. You’re right that a CEO shouldn’t be sweating the small expenses of his operation – but… the thing is, $10,000 for a large street sign probably does seem a lot for a big metal placard to most folks. Maybe that’s a reasonable market rate (it was a big hunk of metal, after all – and needed to be hung safely), maybe it’s not – but the thing is, everybody in the hierarchy ought to be paying attention to the large expenses compared to the budget they’re responsible for. The CEO needn’t worry about paper clips, but if no one in the org “sweats the small stuff” then there is a real risk that, when you buy a lot of individual items – even if each individual excess seems small compared to the total, when you add them all up, it can be a lot. The thing is, ordinary folks may indeed have trouble comprehending trillions – but they know it’s a big number – and they certainly can compare $10k to what they think the reasonable cost of a metal sign should be. If a few (albeit small) line items seem massively overpriced, they naturally extrapolate that excess to the entire amount…

    The concern here is not so much the individual $20m (and you’re right that it’s a small portion of the total pie), but the possibility that every purchase in the $785B, when looked at individually, was overpriced by a large margin.

    ~~~

    BR: On the radio, I compared $20 million to $4 trillion US Federal budget . . .

  11. mathman says:

    The greatest failing of the human race is its failure to understand the exponential function. (A. Bartlett)

    (among many sources to explain this, here’s a short one that gets the point across)

    http://www.webpotential.com/ambiente/exponential_growth.htm

  12. TLH says:

    The numbers are so large. Will there be enough wage push inflation to allow inflation to really pick up? If there is not, will this not end in deflation? You cannot have all markets at highs and expect a good outcome.

  13. CPT Ethanolic says:

    As usual, outstanding appearance on Stand Up. Pete’s show is by far the most honest and intellectually curious radio or tv show I’ve ever heard.

  14. [...] The Boss: Focus on the dollars, not the pennies.  (TBP) [...]

  15. jb.mcmunn says:

    As Everett Dirksen said, “A billion here, a billion there, and pretty soon you’re talking about real money”.

    If the federal government only pissed away $20M per year we’d be in hog heaven, but how many times per year is this “piddly” amount of waste repeated? Even if only 50 times you’re at $1B, and I think that multiplier is missing a few zeros.

    At what point will it get your attention – 500X? 1,000X? Is it implausible that the government wastes the equivalent of $20M 1,000 times per year?

  16. [...] Here is yesterday’s appearance on POTUS, which I referenced last night. [...]

  17. BR,

    while, I do think I ‘get the gist’..

    this Post, almost, seems ~more timely for a different Holiday (Passover)..

    Given, there are 100 cents to a ‘Dollar’..

    “Why is this Cent more important than (any) other Cent?”
    ~~

    differently, maybe this (the Post) is a good Illumination of what is missing in our Political Discourse..(?)

    any *true Conservative would Know–”Conservation, of vital resources (anywhere found), is the Hallmark of Sound Economics..”

    needless to ~say, “”Sound Economics” and our, current, ‘Poli-Sci-Fi Pachinko Parlor’ (masquerading as an ‘Economy’) have little to do with one another..”

  18. BITFU Search Engine says:

    The $20 million sign expenditure is a transaction cost (or a cockroach, depending on your perspective).

    BR’s labeling of the original criticism as “idiotic” is only legit if he’s confirmed that we’re simply dealing with one measly cockroach and that the transaction costs associated with the stimulus bill add up to the negligible $20 million/$785 billion. If you haven’t confirmed, then you’re acting like an idioticday-trader who deems transaction costs as “irrelevant” because he was too lazy (or naive) to add-up all the transactional line-items.

    On the flip-side, we have the original critics reacting to the $20 million as though it’s one cockroach amongst a hoard in this stimulus bill. AGAIN, more research is warranted if you’re going to criticize.

    Are there more roach-like encroachments of waste in the bill? If not it is idiotic…because all you got is $20 million out $785. In this case, you’re not even dealing with pennies, you’re dealing with the fractional pennies found on the signs of a gas station.

    I gotta hunch we’re not dealing with one measly cockroach. But I ain’t got the time to read the thousand f*cking pages associated with the stimulus bill. And maybe this is something we can ALL agree on: There is no legitimate reason in a legitimate democracy for a 2000 page drug-benefit bill or a 1000 page stimulus bill or the obscene 2500 page health-care bill courtesy of The Cockroaches on Capitol Hill.

    Thousand page bills keeps us all as in The State of Idiocy.

  19. b_thunder says:

    They should focus on BILLIONS that Fannie/Freddie/US Treasury spent propping up BofA and the rest…

    But neither party is wiling to upset their future employers and current donors

  20. BenD says:

    Actually $4Tril is to $20Mil as $50,000 is to $0.25

    ~~~

    BR: You are correct — I have it as 0.000005%

  21. DrSandman says:

    I am a scientist, and I can’t manifestly comprehend “trillions.” Billions is about as far as I can get with my grey matter. In classes and discussions, I have banned the word trillion, and forced the use of “1,000 billion.” It keeps everything in the same units. Try it…

    “Sixteen-thousand billion dollars in debt, and we’re worried about 0.020 billion?”

  22. and, more, really, it is Curious that ‘We’ are, still, so focused on ‘Ratios’..and, less so, the Denominator (here, U$D)..

    rather than ‘getting the Root’ of *It..

    What is a ‘U.S. Dollar’?

    How does the ‘U.S. Dollar’ come into existence?

    maybe..

    http://search.yippy.com/search?query=Federal+Reserve+Fraud&tb=sitesearch-all&v%3Aproject=clusty

    http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus-ns-aaf&v%3Aproject=clusty&query=Federal+Reserve+Currency+Monopoly

    will shed some Light..

    +

    http://search.yippy.com/search?query=Federal+Reserve+Open+Market+Committee+meets+in+Private&tb=sitesearch-all&v%3Aproject=clusty

    &

    “…This deadly challenge imposes upon our society two requirements of direct concern both to the press and to the President–two requirements that may seem almost contradictory in tone, but which must be reconciled and fulfilled if we are to meet this national peril. I refer, first, to the need for a far greater public information; and, second, to the need for far greater official secrecy.

    I

    The very word “secrecy” is repugnant in a free and open society; and we are as a people inherently and historically opposed to secret societies, to secret oaths and to secret proceedings. We decided long ago that the dangers of excessive and unwarranted concealment of pertinent facts far outweighed the dangers which are cited to justify it. Even today, there is little value in opposing the threat of a closed society by imitating its arbitrary restrictions. Even today, there is little value in insuring the survival of our nation if our traditions do not survive with it. And there is very grave danger that an announced need for increased security will be seized upon by those anxious to expand its meaning to the very limits of official censorship and concealment. That I do not intend to permit to the extent that it is in my control. And no official of my Administration, whether his rank is high or low, civilian or military, should interpret my words here tonight as an excuse to censor the news, to stifle dissent, to cover up our mistakes or to withhold from the press and the public the facts they deserve to know.

    But I do ask every publisher, every editor, and every newsman in the nation to reexamine his own standards, and to recognize the nature of our country’s peril. In time of war, the government and the press have customarily joined in an effort based largely on self-discipline, to prevent unauthorized disclosures to the enemy. In time of “clear and present danger,” the courts have held that even the privileged rights of the First Amendment must yield to the public’s need for national security.

    Today no war has been declared–and however fierce the struggle may be, it may never be declared in the traditional fashion. Our way of life is under attack. Those who make themselves our enemy are advancing around the globe. The survival of our friends is in danger. And yet no war has been declared, no borders have been crossed by marching troops, no missiles have been fired…”
    http://www.jfklibrary.org/Research/Ready-Reference/JFK-Speeches/The-President-and-the-Press-Address-before-the-American-Newspaper-Publishers-Association.aspx

    ..so that We may begin, 50+ Years after, again, *Hearing the Warning, being Vigilant (u kno, “For A Change”..)

  23. romerjt says:

    I went at it this way with my students just to differentiate a million from a billion. . . Imagine a stack of bills worth 1 million dollars. Now imagine a thousand of those stacks lined against the wall here in the classroom – a billion dollars. . Now imagine you’re Bill Gates and you have 6300 stacks of a 1 million dollars.

  24. northendmatt says:

    Public works in general seems to be an area where conservatives don’t believe in the free market. I’m a civil engineer, and I can’t tell you how many times I get asked “how can X possibly cost so much?” Hey, it’s competitively bid, so if you think you can do it cheaper, start a contracting company.

  25. Cui Bono says:

    Grok? Hmmm…

  26. mw says:

    ILLEGAL CEO’S DRIVING DOWN CEO COMPENSATION A new trend is taking place in the world of big business, and for some shareholders and employees it is a Godsend, and for the increasingly hard hit legal CEO’s it is a disaster. A trend is developing among some of the largest Fortune 500 companies, a trend that is sweeping the business world… Illegal CEO’s. Yes, this is no misprint, these are people that are here illegally (from Latin America, Asia, Europe) but have very good college educations and work really hard, much harder than the average legal CEO. One large company recently hired an individual that they are paying $275,000 per year… His predecessor was “pulling down” in excess of $21,000,000. He has upped the stock price of the company 36% in his first year. He flies and visits all the company divisions 3 times per year, as opposed to his predecessor who visited all of them in 3 years. I talked to one recently deposed CEO, he told me in a disturbed tone (the slight smell of alcohol on his breath) ” This has got to stop, you know I had a house in the south of France, a house in Tuscany, a 600 foot yacht, and a beautiful 23 year old wife ( he was 56) The illegal CEO’s are “cleaned up” by the company boards, they are given new names, and identities (legalized) with the limitless funds available from these mega corporations. When talking to another ex-CEO who was at his wit’s end, he said ” We legal CEO’s must stand together and fight this trend, I recently talked to a friend of mine, and we are seriously considering a Union.” ….. OK, WE CAN WISH CAN’T WE?

  27. Greg0658 says:

    good one mw :-) .. say it ain’t so .. think of the McMansions crumbling and the county taxbase to boot

  28. [...] what large numbers mean (and percentages, as we know from behavioral economics). Over at The Big Picture Barry Ritholtz presents a good method for explaining the meaning of numbers to people by putting [...]

  29. Bill says:

    Listen to your segment on Stand Up – excellent! Couldn’t agree with you more.

    You are right – people can’t grasp big numbers. I’d argue that the number – independent of money – that people can grasp is quite low. A lot of people can only grasp the number “1″ – themselves. Those people start off arguments with “Well I know this person…”

    The number is probably on the order of 100,000 – the number of miles you put on your car – or 30,000 – the number of days you live. Don’t say 1,000,o00 – that’s more than the number of days since the Peloponnesian war – and we don’t remember that.

    A piddly number those 30,000 days. Time to stop typing and do something with my day.