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What Is Wrong With Ratio Analysis Used By Wall Street? Baseball Again Offers An Interesting Example

I have tried to answer the question posed in the title by appealing to baseball stats once again.

It appears to me that baseball fans, much more than Wall Street analysts, know the difference between the ratio y/x and the ratio ∆y/∆x. Here x is the number of At Bats (NYSE:AB) and y the number of Hits (NYSE:H). The ratio y/x = H/AB = BA is the batting average, one of the three categories in which a player must lead to win the Triple Crown, the other two being home runs (NYSE:HR) and Runs Batted In (RBI). When Miguel Cabrera - with a batting log of (At Bats, Hits, HR) = (4, 4,3), (4, 1,1), (4, 2,1) (3, 2,1), over a four-game stretch from May 19 to May 23, 2013 - hit six home runs total, with a home run in each of the four consecutive games, no one was thinking about the ratio y/x. Everyone was just using the ratio ∆y/∆x = 9/15 = 0.600 and talking about the incredible stretch with a BA of 600. Here ∆y = 9 is the additional hits (9 = 4 + 1 + 2 + 2) and ∆x = 15 is the additional AB (15 = 4 + 4 + 4 + 3).

Rather surprisingly, as discussed in detail in an article I uploaded yesterday, the same logic is not being used to predict the end of the season RBI for Cabrera who is widely believed to be on pace to break the "untouchable" single-season RBI record of Hack Wilson, established in 1930 and also capture a second straight Triple Crown.

The implications of using the rate of change h = ∆y/∆x, or the derivative, dy/dx, of the mathematical function relating these three quantities is discussed here (and in two companion articles, click here and here). The broader applications of such an analysis to many problems in the so-called "soft sciences" (economics, finance, business, social and political sciences, etc.) is also discussed, briefly.

See link here