I know that the past few days have seen the stock market have huge drops in prices.  The big problem that we are encountering is whenever analysts mention stock prices dropping 3% one day and 5% the next, a lot of people will assume that a stock has dropped 8%.  What a lot of people are not considering however is the effect of exponential decay.

Exponential decay is when a quantity decreases at a rate proportional to it's value.  Lets say in the above example that a stock sits at a price of $100.  If that stock declines 3% on the first day, and 5% on the second day, the formula would be calculated for the first day as:

          $100 - 3% = $97

To then calculate the drop for the second day in a row, we would then continue with:

          $97 - 5% = $92.15

If you calculated this as a straight 8% loss, your total would amount to an even $92.  While this may seem trivial at the moment, if you had several hundred shares of this stock that dropped for a number of days, you could very easily see where the difference would matter, as the real drop of the stocks would only be at 7.85%.