Cherry Picking Fallacy

There are two kinds of statistics: the kind you look up and the kind you make up.

– Rex Stout

The symptom: Anything under budget target is free money.

The example: Your local sports team is doing well and has made the playoffs! Suddenly you think how much fun it would be to actually attend the playoff game. The only problem is that a ticket is €150 and you do not really think you can afford that. So you sit down with your budget to see if you can find some savings. You notice it is the 25th of the month and so far you are under your monthly budget in a few categories. You are €80 under for food, €10 under for gasoline, €10 under for haircuts, and €20 under for household items. You reduce your budgeted amount in each of those categories for this month and then resolve not to buy anything in those categories for the next 5 day. Problem solved. Now you have €150 for the ticket. It did not turn out to be so difficult after all.

You probably recognize the above reasoning as nothing more than cherry picking of budgeting numbers. On any given month, many categories are over their target and many are under their target. Taking a slightly different perspective, half the time the monthly grocery bill will be over target and half the time it will be under. But when we need more money, we tend to focus on all the good numbers and forget the bad ones.

Looking back over the past dozen posts, you can see many variations of cherry picking. We look at the inflows into one account and ignore the outflows from another. We crow about the categories under budget and brush off those over budget. We highlight the time periods of low spending and dismiss the periods of high spending. In fact, it is quite easy to imagine all of our finances are doing well as we create a “parallel universe” budget where we isolate gains and integrate losses.

Accrual accounting is designed to normalize these numbers so that realistic comparisons can be made. This helps avoid cherry picking. It is true that one could simply analyze the numbers a little bit and conclude that all is not well, but human nature seems to want to spin these numbers in a positive light. Not having cash flow outliers from which to cherry pick increases the chances that we will be honest and objective about our finances.

And again, we would point out that even if you do not formally use accrual accounting for small budget items, you can still improve things by simply thinking in accrual terms. In the example above, you know that you are consuming a certain amount of food and gasoline and household products each day. The price of the items you consume is your cost in accrual terms and is probably relatively constant. It certainly does not change just because you happen to eat everything in the refrigerator during the last week of the month or wait another week to stop at the gas station.

Hence, if you think in terms of the accrual numbers, you will not be tempted to imagine that you “found money” or “cut your budget” by not going to the store for a week. If you did not decrease your consumption, you probably did not save any money relative to your budget baseline.

And that concludes this whole accrual accounting rabbit trail we have been on for quite some time in these very infrequent posts. We have personally done about as much writing on accrual accounting as would like to do for one lifetime!

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