Lesson 25 of 25 · 8 min

What changes when the numbers are written down

Naming a bias does not disarm it; a figure on paper differs from one in memory in being checkable.

Nothing in the preceding twenty-four lessons is corrected by having read them. Biases are not beliefs, so they do not yield to information about themselves; a person who can define anchoring still anchors, and does so using the same peak price as before.

What does change an estimate is a change in where the estimate is kept. A remembered figure has no derivation attached, cannot be compared with the document it came from, and drifts in the direction of whatever it is convenient for it to be. A written figure can be checked against a statement, and it can be wrong in a way that is visible to the person holding it.

Take a borrower who reports headroom of about 50 percent from memory: collateral about $1,800,000, balance about $600,000, threshold 70 percent. Those inputs give a trigger value of $600,000 ÷ 0.70 = $857,143 and headroom of ($1,800,000 − $857,143) ÷ $1,800,000 = 52.4 percent. Now correct each input against the documents, one at a time.

Four corrections, none of them large on its own:

Collateral is $1,742,300 on the statement, not $1,800,000. Headroom becomes 50.8 percent.
The balance is $637,412, including $12,412 of accrued interest not yet billed. Headroom becomes 47.7 percent.
The threshold in the agreement is 68 percent, not 70. Headroom becomes 46.2 percent.
The threshold is measured against lending value, not market value. At a 61 percent blended advance rate, lending value is $1,742,300 × 0.61 = $1,062,803, and headroom becomes 11.8 percent.

The remembered figure was 52.4 percent and the computed figure is 11.8 percent, a gap of 40.6 points. Three of the four corrections together account for 6.2 points; the fourth, which is not a number at all but a question about which denominator the agreement names, accounts for 34.4. Track 1 lesson 6 makes the same point without any psychology in it.

The difference between 52.4 percent and 11.8 percent was not insight. It was four divisions performed on paper rather than in memory, using figures that were available to anyone who opened the documents.

Key terms

Remembered figure: A number carried in the head. It has no source attached, so nothing about it can be checked and nothing about it can be shown to be wrong.
Denominator basis: Whether a threshold is measured against market value or against lending value after haircuts. The same loan produces very different headroom under each.
Reconciliation: Working a figure back to the document it came from. It converts a belief about a number into a number.

Worked example

Four corrections between a memory and a calculation

Reported from memory: collateral about $1,800,000, balance about $600,000, threshold 70% of market value.

Headroom on the remembered inputs: 52.4%
Correcting collateral to $1,742,300: 50.8%
Correcting the balance to $637,412: 47.7%
Correcting the threshold to 68%: 46.2%
Correcting the basis to lending value: 11.8%
Total gap: 40.6 points

Every input was remembered approximately correctly. The output was wrong by a factor of four, and the largest single error was not a figure but a question nobody had asked.

Check yourself

A borrower recalls collateral of $1,800,000, a balance of $600,000 and a 70 percent threshold, giving 52.4 percent of headroom. The documents show $1,742,300, $637,412, 68 percent, and a threshold measured against lending value at a 61 percent blended advance rate. What is the headroom?

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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.