This is a nerdy finance rant inspired by my frustration with the stupidest units ever created, with the exception of the English system of measurement, ‘basis points’. Basis points, as used in financial jargon, simply refer to hundredths of percentage points. For example, 100 basis points = 1%. Thus, if some annoying MSNBC commentator says that Wal-mart’s stock went up 10 basis points, they mean it went up 0.1%.
Why, you might ask, wouldn’t they just say ‘Wal-mart went up 0.1%’? GOOD QUESTION! The only answer I can come up with is that Wall Street & financial gurus enjoy unnecessarily complex lexicon that confuses lay people and makes themselves sound wise & competent, despite any evidence to the contrary. Hence the conflagration of obsfucating terms, which I eschew, in financial jargon (see, I can do it myself using non-financial English!)
Introducing extra units that add no value to discussions of finance makes things more difficult. Good choices of units (which are units of measurement that one groups together, like inches or gallons) should make discussions and math easier, not harder.
Case in point
Here’s a formula taken from a Harvard Business School article on bond duration (don’t worry about what that is) which uses basis points, which they abbreviate as ‘bps’ (= more useless notation.)
dP/P = -8*dY = -8*10bps = -80bps = -0.08% [sic; the author screwed up the answer, which should be -0.8%. This is probably a result of using stupid basis points.]
Here’s the exact same equation using percentages, like any rational person would:
dP/P = -8*dY = -8*0.1% = -0.8%
To me, the second equation looks way easier (no weird ‘bps’ units), is quicker to write out (1 less step), and less error prone since you’re not converting units back and forth.
Bottom line: STOP USING BASIS POINTS AND JUST REFER TO PERCENTAGES OR DECIMAL FRACTIONS YOU OBNOXIOUS FINANCIAL PROFESSIONALS & ACADEMICS!
Thanks, I feel better now.
“Make everything as simple as possible, but not simpler.”
— Albert Einstein
I do agree that it can be a confusing term, but once you know it, it makes things easier. For instance, if I say a stock went up .1%, but I mean to say it went up .1 percentage points (people do this quite often) then we’re both hosed. Instead if I say 10 basis points we all know. I agree that the use of bps in mathematical equations is just absurd. There’s no efficiency gained by using it. Hell the guy screwed up the math so it was pretty inefficient.