Sign up to myFT Daily Digest to be the first to know about Personal Finance Advice & Comment news.
Know your APR from your AER? Understand the power of compound interest? If you are paid £9 per hour, what would be your hourly rate if you had a pay rise of 5 per cent?
If you can work out the answer to the third question without using a calculator, congratulations — you’re in the top half of the UK adult population. The new hourly rate would be £9.45 (10 per cent of £9 is 90p; half of that is 5 per cent, or 45p; added back on to the £9 rate makes £9.45).
Research from the National Numeracy charity highlights that half of adults in this country have numeracy skills no better than we’d expect of an 11-year-old primary schoolchild.
I firmly believe that those who are competent with maths are more likely to have the skills to be on top of their personal finances. This could be calculating your correct pay, comparing the cost of mobile phone contracts or how much interest you will be charged on your credit card (this is where knowing the difference between APR and AER comes in handy).
Sadly, as a maths teacher, I know that many people — adults and children alike — feel that they can’t “do” maths. I’ve written quite a few columns for FT Money explaining why we should all love numbers, and how they’re not as scary as some people might think. In fact, I feel so strongly about this topic that I have written a book about it —The Life-Changing Magic of Numbers.
Numbers are the language in which our finances are expressed. From relatively straightforward calculations of simple interest to the “weapons of math destruction” that contributed to the financial crisis in 2008, maths is simply too important for us to ignore.
Maths is a tool for us to understand the world. Within the financial world, numbers can be used to trick consumers but if we understand the basic concepts we are in a position to make a better judgment.
As I advise my students, let numbers be your friend and you’ll have half a chance of navigating this complex financial world.
As many of you will know from my University Challenge days, I am a sucker for a quiz show. So here’s a starter for 10: which diminutive French general once said: “The advancement and perfection of mathematics are intimately connected with the prosperity of the state”?
Yes, 10 points to you if you guessed Napoleon Bonaparte. This quotation has special relevance ahead of the Budget next week, as changing forecasts have magically wiped £13bn off the UK government deficit (numbers matter greatly to politicians too).
To understand Napoleon’s words in a different context, for “prosperity”, substitute in “health, happiness and enjoyment of life” and for “the state”, substitute “the people”. I genuinely believe maths can help us understand the world around us.
However, maths can be applied to all parts of your life, not just money management.
For example, can probability theory tell us something unexpected about our lives? Let’s flip a coin. With one flip, a head or tail is equally likely. The second time, I may get a head; a third time, perhaps a tail. With each flip, the odds of a head or tail remain the same, independent of the preceding throw. But as the number of results increase, the more likely it is we will get closer to that theoretical 50:50 split.
This is a demonstration of the “law of large numbers”. The more you do something, the more inevitable the probable outcome. Picture my university town of Cambridge in the hippy 1960s. Maths professor John Littlewood theorised that due to the law of large numbers, with any large enough sample, we can expect the unexpected.
Littlewood’s law explains the chances of how often an individual can expect to experience a “one in a million” event. By his calculations, this should happen to most of us once a month.
How? Let’s say we’re awake and alert for eight hours in a day, and we see and hear things once a second. With some quick maths, this give us 28,800 events in a day (eight hours x 60 minutes x 60 seconds).
The vast majority will be humdrum (such hearing a seagull squawk or a traffic light turn green). But over the course of just over a month (34.72 days to be precise), we will have witnessed a million different events at the rate of 28,800 per day.
So mathematically speaking, a million-to-one event will happen to every single one of us, in just over a month. With the global headcount of more than 7.6bn people, highly unlikely events are preordained to happen every single day to people across the planet. We only notice the extraordinary and forget the ordinary. This is the inevitability of improbability.
Another improbability: mathematics, aliens and dating. Surely there’s no connection between them? In the 1960s, US astronomer Frank Drake came up with an equation to estimate the number of communicating alien civilisations in our galaxy. Adapting his probabilistic model, Drake’s equation allowed me to approximate the number of women I could date.
With the power of maths, my guesstimate is that there are 73 UK women who might be an ideal match for me. With our population of 66.5m, the odds of the next person I bump into being one of them is one in 910,000.
That’s a lot of dates. But the so-called “theory of optimal stopping” could be my mathematical Cupid. At what point in the dating game should we stick rather than twist? My mathematic calculations give me an answer of 37 per cent. Considering all the people we could date, we should go on dates with the first 37 per cent, then settle for the first person who is better than all the previous ones we met before.
Mathematically, the 37 per cent comes from 1/e (the natural exponential function and Euler’s number of 2.718).
A slightly intense conversation for a first date, perhaps. But this concept can also be applied to housebuying. If we expect to see 20 properties in total, then we should settle for the first property that is better than the first seven properties we see (37 per cent of 20 houses is 7.4).
In another 46 years, assuming I live for the UK’s average life expectancy for a male, I want my headstone to say: “Here lies Mr Seagull, who made maths class a little bit less icky and a lot more fun.”
Bobby Seagull’s book “The Life-Changing Magic of Numbers” is published by Penguin Books. Bobby will be appearing at the next FT Money reader event on the evening of Monday November 26 in central London. Tickets cost £40, including a signed copy of his book (RRP £16.99) plus refreshments. To book your place and view full terms and conditions, go to FT.com/seagull
Get alerts on Personal Finance Advice & Comment when a new story is published