The Flaw of Averages: Why We Underestimate Risk in the Face of Uncertainty by Sam L. Savage


The Flaw of Averages: Why We Underestimate Risk in the Face of Uncertainty
Title : The Flaw of Averages: Why We Underestimate Risk in the Face of Uncertainty
Author :
Rating :
ISBN : 1118073754
ISBN-10 : 978-1118073759
Language : English
Format Type : och 1 mer , Inbunden, Pocketbok
Number of Pages : 416 pages
Publication : Wiley

A must read for anyone who makes business decisions that have a major financial impact. As the recent collapse on Wall Street shows, we are often ill equipped to deal with uncertainty and risk. Yet every day we base our personal and business plans on uncertainties, whether they be next months sales, next years costs, or tomorrows stock price. In The Flaw of Averages, Sam Savageknown for his creative exposition of difficult subjects describes common avoidable mistakes in assessing risk in the face of uncertainty. Along the way, he shows why plans based on average assumptions are wrong, on average, in areas as diverse as healthcare, accounting, the War on Terror, and climate change. In his chapter on Sex and the Central Limit Theorem, he bravely grasps the literary third rail of gender differences. Instead of statistical jargon, Savage presents complex concepts in plain English. In addition, a tightly integrated web site contains numerous animations and simulations to further connect the seat of the readers intellect to the seat of their pants. The Flaw of Averages typically results when someone plugs a single number into a spreadsheet to represent an uncertain future quantity. Savage finishes the book with a discussion of the emerging field of Probability Management, which cures this problem though a new technology that can pack thousands of numbers into a single spreadsheet cell. Praise for The Flaw of Averages Statistical uncertainties are pervasive in decisions we make every day in business, government, and our personal lives. Sam Savages lively and engaging book gives any interested reader the insight and the tools to deal effectively with those uncertainties. I highly recommend The Flaw of Averages.
William J. Perry, Former U.S. Secretary of Defense Enterprise analysis under uncertainty has long been an academic ideal In this profound and entertaining book, Professor Savage shows how to make all this practical, practicable, and comprehensible.
Harry Markowitz, Nobel Laureate in Economics

The Flaw of Averages: Why We Underestimate Risk in the Face of Uncertainty Reviews

  • V Ghezzi

    The book is a kind of autobiographic story of the application of probability methods in various areas such as finance, industry, medical, etc.Sure the final objective is to promote the author's website and software, and the Montecarlo approach in general. However, I enjoyed this reading.I did not understand why the author speaks against the traditonal statistics terminology, and proposes other funny terms (for example: scatter plots instead of covariance). This adds some confusion insteaf of being of any practical help.It's definitely a very long book; the real useful content might be condensed to a 20% of the pages.As a conclusion, it may provide a general picture to the beginners in probability; but it will not satisfy the experts.

  • Mattia

    I work in IT software development and I've always had to deal with plans and estimates. This book explains with extreme clarity why the traditional way of using averages for such reasons is wrong in so many ways!I already knew the saying that you're not meant to use averages as they are wrong half the time, but this book still opened my eyes on the real reasons behind it.Some of my favourite quotes: when we use single numbers to estimate uncertain future outcomes we are not just usually wrong, but we are consistently wrong Plans based on average assumptions are wrong on average when managers ask for a forecast, they are really asking for a number, which involves the Flaw of Averages risk is in the eye of the beholder it is essential to replace numbers with distributions to cure the flaw of averages weak form of the flaw of averages: a single number doesn’t give the whole picture the strong form of the flaw of averages states that average or expected inputs don’t always result in average or expected outputs information has no value at all unless it has the potential to change a decision the simulation of the sum is not the sum of the simulationBy the way the book is well written. The author is funny and has an easy to read style he manages to make difficult topics like finance and economics easy to understand even for me that I know very little about them.The bottom line for me is: whenever faced with uncertainties (which is the norm in software development) use distributions and simulations, not averages.

  • Peter

    I hope that many buy I feel, I think etc in the following) there are some technical points that are not well explained. One specific passage has two paragraphs that explain nothing of the content implied by the header of the subject. This was frustrating. Oh my ! graphs, plots etc with axes not labelled ? very poor. A constant annoyance throughout the book Simpson's paradox is not explained not such a problem as it is a well documented elsewhere. (BTW it's only sums.) given the otherwise authoritative nature of the book the above are notable deficiencies. there is than a little element of my dad did this, my friends did that at first a bit annoying and then both charming (we can only hope our sons insider to a lot of formative economics and statistical innovation as a child and then as a practitioner. (So not a criticism really only in a time series way) there is an element of evangelism about the book and a lack of reflective self criticism that detracts from the otherwise, albeit easy going, analytical style.Overall I recommend this book.

  • sameer

    Quite an interesting read. Explores how the general reliance on the "average number" in business, finance, technology can cause predictive problems. The author writes that one should use probability distributions instead of the average to make decisions and create realistic models.

  • Prairy Earth

    This is a fantastic book that really makes you think about the concept of averages and its affect on people when the term is used. There are books that one reads in their life that change one's thinking. This book changed mine in the way I look at business issues.