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Benford’s Law and Greece

Sep 22, 2011 • Behavioral Economics, Businesses, Financial Markets, Government, International Trade and Finance, Macroeconomic Measurement, Thinking Economically • 174 Views    No Comments

Does it matter that low first digits occur more frequently?

First some history.

During the 1920s, Frank Benford, a physicist at GE, noticed that “one” appeared more frequently as the first digit of a number. To test his thesis, he accumulated random lists. He was said to have noted all of the numbers in an issue of Reader’s Digest. He went through demographic and scientific data. Finally he calculated that #1 was the first digit in 31% of the numbers, #2 for 19%, and #9 was the first digit in only 5% of all of his numbers. This brief article about Benford’s conclusions is fascinating.

The current relevance of Benford takes us to Greece. “Undercover Economist” Tim Harford describes it wonderfully. During 2000, just before Greece joined the euro, its deficits deviated considerably from Benford’s Law. As Harford explains, “The criteria were somewhat irksome…but nevertheless the Greeks seemed to comply…Eventually it became clear that the Greek numbers did not quite add up.”

The Economic Lesson

Different from debt which totals all a government owes, the deficit is the amount by which government expenditures exceed revenue during a fiscal year. For Greece, during 2009, the new prime minister said that the deficit appeared to be closer to 12.5% of GDP rather than the previously reported 3.7%.

An Economic Question: How does this Dilbert cartoon relate to Benford’s Law?

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