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I always wondered what the purpose of “basis points” were.  I knew that there were 100 basis points in one percent, but I couldn’t figure out why someone wouldn’t just use decimals for that.

I have since learned what basis points are for, and I am here to share that knowledge with you, lucky reader –

Basis point are for specifying a change in a relative number.  A percentage is a relative number.  If you want to describe a change to a percent, it can get very confusing trying to use percentages to do this.  You are trying to specify a change a percentage with another percentage.  So, does the change affect the base number as a percent, or as an absolute?

An example –

Your profit margin in Q1 was 13%.  Someone tells you that Q2 numbers are “2% better than Q1.”

So, is the profit margin for Q2 13.26% (13% x 102%), or 15% (13% + 2%)?  Therein lies the problem.

With basis points, you don’t have to worry.  Let’s say that the profit margin for Q2 was actually 15%.  Then you would just say that Q2 was “200 basis points” better than Q1.  Since basis points are absolute, there’s no confusion.

This is just another example of Deane learning something late in life that he really should have learned in college.