Wednesday, July 2, 2008

Obsolescence

Paul Krugman quotes the Dow close today. I'd like to take this opportunity to remind everyone that the Dow is an ancient index - 114 years old - and the methodology reflects this.

For example, if 3M increases by $1 and IBM decreases by $1, the index is flat - neglecting the fact that to 3M, $1 represents an increase of $704m in the paper worth of the company, but the same one dollar decline in IBM represents a paper loss of $1370m.

Those numbers are not the same, and that fact should be reflected in the index. Utilize more appropriate and modern measures.

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