December 14, 2004
From the desk of Mindles H. Dreck:Deceptions of Scale
While I generally agree with Robert Shiller, I think he really needs to think about adjusting the scale on this chart. By adding all that useless headroom on the earnings axis he overstates his point. Try scaling the right axis so the maximum is 160, roughly the multiple of the starting point that is used on the left axis. (for an html version of charts click here and then on 'figure 1.1')
This graph was featured in his book, and it's always bugged me.
Posted by Mindles H. Dreck at December 14, 2004 04:28 PM | TrackBack | Technorati inbound linksWhat's more interesting is the chart of P/E ratios over time. They've actually stayed in a fairly constrained range with two big peaks.
Posted by: Frankenstein on December 14, 2004 05:05 PMMindles, since you're up and blogging, would you please get rid of this comment? It's driving everyone nuts. Thanks.
Posted by: Katherine on December 14, 2004 05:31 PMDone. Does its presence have some effect I don't know about?
Posted by: "Mindles H. Dreck" on December 14, 2004 05:52 PMI agree. The scale (0 to 600) appears to be chosen so that the Earnings line always lies beneath the Price line. That's not a very good reason for picking the scale.
Posted by: Benedict on December 14, 2004 07:45 PMNo no, to really drive the 'point' home, increase the right scale so the top is at something like, oh one billion, and cut the left scale by half (just because). Basically whatever it takes to make the earnings line appear flat. Wow, the market really is irrational!
Now if we could only manipulate a series of positive numbers to appear negative and get away with it...
Posted by: David Andersen on December 14, 2004 07:52 PMDone. Does its presence have some effect I don't know about?
Well, you obviously don't read the comments otherwise you wouldn't have asked this question.
The MOST effective way to handle it is the most honest - start both graphs at roughly the same level, by establishing a range of 0 to 110 for the right scale. Earnings pretty much track prices, right up until about 1998, when the price curve absolutely runs away to the north while the earnings curve continues on its existing trend.
Posted by: rvman on December 15, 2004 10:12 AMCarol you are going to have to cut me some slack. The last few weeks have involved surgery and a variety of other things.
Even so, I don't necessarily read all of Jane's commments, and had I looked at that one I would have skimmed it and deleted it without a lot of thought.
Posted by: "Mindles H. Dreck" on December 15, 2004 11:47 AMrvman:
Interesting question, I have gone back and forth, should the ratio of scales be the starting multiple (which is a bit arbitrary), or the averages of the multiple over the period?
We should ask Edward Tufte his opinion.
Posted by: "Mindles H. Dreck: on December 15, 2004 11:57 AMThanks, Mindles. It was just an unfortunate coincidence that anyone was tempted to read it at all.
Posted by: Katherine on December 15, 2004 02:14 PMComments are Closed.