Wednesday, October 06, 2010

The dangers of serial thinking

I bought a horse for 10$ and sold it to a friend for 20$. I bought the same horse from the same person for 30$ and sold it to the same person for 40$ . What was my profit ?

If you came up with 10$ as the answer  (20-10) + (20-30) + (40-30)  , you fell into the trap of serial thinking.

If you came up with 20$ as the answer , you are right because these two are separate transactions.

Transaction 1 - You bought and sold the horse. Profit = 20 - 10 = 10$
Transaction 2 - You bought and sold the horse. Profit = 40-30 = 10$

Total profit = 10 + 10 = 20$

If  you are financially savvy  , you would do

profit = total cash inflow - total cash outflow
         = (40 + 20) - ( 30 + 10)
        = 60 - 40
        = 20$

Beware  the dangers of serial thinking .
Start  thinking laterally.

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