'Sensex sees third biggest fall' ran most newspaper headlines on Thursday. In giving this headline, most newspaper editors forgot their fifth standard mathematics.

A fall or gain is always expressed as a proportion or a percentage of something. In this case that something is the number at which the Sensex had closed on the previous day. Hence, any fall or rise in the Sensex should be expressed as a percentage of the previous day's close.

On Wednesday, the http://www.rediff.com/money/2007/aug/01sensex.htm Sensex fell by 615 points from the Tuesday's close of 15,551. This means a fall of 3.96% from the previous day's close.

As you can see from the accompanying table, when the fall is expressed in the correct way, it is the tenth biggest fall ever and not the third biggest fall as most newspapers make it out to be.

Source: www.bseindia.com

Hence it is very important to know, when to express things in percentage terms and when to express them in absolute terms.

Let us take an example to understand this. For the sake of argument let's say the Sensex closed on a certain day at 6,150. The next day it falls by 615 points that means a fall of 10% in percentage terms. Now this fall is also 615 points. Is it equal to the fall that we saw yesterday? Absolutely not.

A fall of 615 points from a level of 6,150 is much greater in comparison to a fall of 615 points from a level of 15,551.

In choosing to express things in absolute terms rather than percentage terms, newspapers as well as real time business news channels, essentially end up painting the situation to be much more graver than it actually is. Yes, a fall of 615 points is big, but it is not as bad as newspapers and business news channels make it out to be.

So this brings me back to my original question: 'Have newspaper editors actually forgotten fifth standard mathematics?' Well, not really.

So then why do they do this? For the simple reason that 'third biggest fall' makes for a much better headline than the real 'tenth biggest fall.' A better headline makes more people likely to read it, even though it distorts the correct picture.

John Allen Paulos in his book A Mathematician Plays the Stock Market has a good explanation for this phenomenon. He writes: "Overreactions are abetted by the all-crisis-all-the-time business media."

And he asks investors to retain their sanity by remembering: "Just as beauty and academic quality don't change as rapidly as ad hoc lists and magazine rankings do, so, it seems, the fundamentals of companies don't change as quickly as our mercurial reactions to news about them do."