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The flaw of averages: why we underestimate risk in the face of uncertainty
192
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2010
Year
Probability ManagementRisk DecisionsUncertain ReasoningRisk ResponseUncertainty QuantificationDeep UncertaintyRisk ManagementManagementDecision TheoryStatisticsEconomicsHigh UncertaintyStatistical ThinkingRisk PerceptionInternational Risk ManagementRisk MonitoringRisk MeasurementFinanceBehavioral EconomicsBusinessRisk Analysis (Business)Uncertainty ManagementDecision ScienceCentral Limit TheoremWeb SiteFinancial Risk
The recent Wall Street collapse illustrates our poor ability to handle uncertainty, yet we routinely base decisions on uncertain variables, and the book highlights common mistakes in risk assessment. The book aims to introduce Probability Management, a new technology that packs thousands of numbers into a spreadsheet cell to address risk assessment problems. Savage explains concepts in plain English, offers a web site with animations and simulations, and presents a technology that packs thousands of numbers into a single spreadsheet cell. He demonstrates that average‑based plans are systematically wrong across domains such as healthcare, accounting, the War on Terror, and climate change. The book is recommended for high‑impact business decision makers and includes a provocative chapter on gender differences and the Central Limit Theorem.
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 month’s sales, next year’s costs, or tomorrow’s 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 reader’s 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.