Question:
Explain rounding errors?
anonymous
2016-01-10 09:55:48 UTC
Hello,

Can someone please explain how rounding errors can occur within calculations when rounding up or down rules apply?

I would be very thankful to the person that assists me to a good quality.
Three answers:
David
2016-01-10 10:07:27 UTC
It happens when trying to figure out future investments..



Compound interest:



let's say that you invest $1000 at 5% compounded monthly. How much would you have after 6 years?



A = 1000(1 + .05/12)^(12 * 6)

if you round .05/12 to three decimal places = .004



A = 1000(1 + .004)^72

A = 1332.9913224783410750762016855974

and now rounding again to represent dollars and cents =

$1,332.99 after 6 years



If you didn't round until the end

A = 1349.0177441587457030833945304768

$1,349.02



the rounding error cost $16.03 in earnings, which is a 4% error
Sqdancefan
2016-01-10 12:44:06 UTC
Rounding cost my insurance company quite a bit of money, until they figured out how to avoid the expense.



Say my insurance bill is $100 for the year, to be paid monthly. The monthly amount will need to be rounded to a cent, so is $8.33. At the end of 12 months, the total amount collected is only 99.96, which is 0.04 short of the intended amount.



My insurance company used to send a mailing in the 11th month telling me that my final month's payment would be $8.37, to make the correct total for the year. Of course, the cost of the mailing far exceeded the extra amount collected.

_____

This is an example of a situation where rounding error can be corrected relatively easily. My insurance company now details each month's bill amount in the initial mailing, saving the cost of an 11th-month mailing. Here, an entire company's way of doing business was affected by rounding error.





Consider space flight. It involves predicting the future positions of numerous celestial bodies and the resulting gravitational influence on the free flight of a spacecraft. The equations involved cannot be solved in closed form, so numerical solution is used.



Generally, future positions are computed from present positions and some estimate of the applied forces. When the intermediate results of these computations are rounded, which they must be due to the finite precision of numbers in the computer, the errors accumulate and predicted positions can vary wildly from actual positions. (This is one reason why mid-course corrections are part of the flight plan.)





While the equations for predicting space flight may be "well-behaved", the equations for predicting weather are not. Small changes in the initial conditions can cause large changes in predicted weather. (This is sometimes referred to as "the butterfly effect".) Thus, the nature of the rounding of numbers used in computation can have a significant influence on the computation results.
?
2016-01-10 10:11:49 UTC
Consider payroll. Unemployment tax is computed as a % and deducted from each paycheck. This is rounded. At the end of the quarter, total unemployment tax is calculated as a % of the total payroll. This can differ from the total of payroll deductions taken due to the accumulation of rounding errors. It is a pain to adjust for this.

Payment is made from the quarterly total. However, you have an account payable from the total of the payroll deductions.


This content was originally posted on Y! Answers, a Q&A website that shut down in 2021.
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