The Flaw of Averages

Informationen zum Autor Sam L. Savage is a Consulting Professor of Management Science and Engineering at Stanford University! and a Fellow of the Judge Business School at the University of Cambridge. Klappentext A must-read for anyone who makes business decisions that have a major financial impact Tomorrow's stock price! next month's sales! next year's costs these are all numbers we don't know yet. Yet everyday! we base our personal and business plans on these kinds of uncertainties. Zusammenfassung A must-read for anyone who makes business decisions that have a major financial impact Tomorrow's stock price! next month's sales! next year's costs these are all numbers we don't know yet. Yet everyday! we base our personal and business plans on these kinds of uncertainties. Inhaltsverzeichnis Preface xv Acknowledgments xix Introduction Connecting the Seat of the Intellect to the Seat of the Pants 1 FOUNDATIONS Part 1 The Big Picture 9 Chapter 1 The Flaw of Averages 11 Chapter 2 The Fall of the Algebraic Curtain and Rise of the Flaw of Averages 22 Chapter 3 Mitigating the Flaw of Averages 26 Chapter 4 The Wright Brothers Versus the Wrong Brothers 34 Chapter 5 The Most Important Instrument in the Cockpit 40 Part 2 Five Basic MINDles for Uncertainty 45 Chapter 6 MINDles Are to MINDs What HANDles Are to HANDs 49 Chapter 7 Mindle 1: Uncertainty Versus Risk 52 Chapter 8 Mindle 2: An Uncertain Number Is a Shape 55 Chapter 9 Mindle 3: Combinations of Uncertain Numbers 67 Chapter 10 I Come to Bury SIGMA! Not to Praise it 78 Chapter 11 Mindle 4: Terri Dial and the Drunk in the Road 83 Chapter 12 Who Was Jensen and Why Wasn't He Equal? 91 Chapter 13 Mindle 5: Interrelated Uncertainties 98 Part 3 Decisions and Information 109 Chapter 14 Decision Trees 111 Chapter 15 The Value of Information 118 Part 4 The Seven Deadly Sins of Averaging 127 Chapter 16 The Seven Deadly Sins of Averaging 129 Chapter 17 The Flaw of Extremes 133 Chapter 18 Simpson's Paradox 139 Chapter 19 The Scholtes Revenue Fallacy 142 Chapter 20 Taking Credit for Chance Occurrences 147 APPLICATIONS Part 5 The Flaw of Averages in Finance 155 Chapter 21 Your Retirement Portfolio 157 Chapter 22 The Birth of Portfolio Theory: The Age of Covariance 163 Chapter 23 When Harry Met Bill(y) 169 Chapter 24 Mindles for the Financial Planning Client 175 Chapter 25 Options: Profiting from Uncertainty 181 Chapter 26 When Fischer and Myron Met Bob: Option Theory 192 Chapter 27 Prices! Probabilities! and Predictions 200 Part 6 Real Finance 213 Chapter 28 Holistic Versus Hole-istic 215 Chapter 29 Real Portfolios at Shell 222 Chapter 30 Real Options 228 Chapter 31 Some Gratuitous Inflammatory Remarks on the Accounting Industry 236 Part 7 The Flaw of Averages in Supply Chains 245 Chapter 32 The DNA of Supply Chains 247 Chapter 33 A Supply Chain of DNA 254 Chapter 34 Cawlfield's Principle 257 Part 8 The Flaw of Averages and Some Hot Button Issues 263 Chapter 35 The Statistical Research Group of World War II 265 Chapter 36 Probability and the War on Terror 272 Chapter 37 The Flaw of Averages and Climate Change 289 Chapter 38 The Flaw of Averages in Health Care 299 Chapter 39 Sex and the Central Limit Theorem 307 PROBABILITY MANAGEMENT Part 9 Toward a Cure for the Flaw of Averages 317 Chapter 40 The End of Statistics as You Were Taught It 319 Chapter 41 Visualization 324 Chapter 42 Interactive Simulation: A New Lightbulb 328 Chapter 43 Scenario Libraries: The Power Grid 332 Chapter 44 The Fundamental Identity of SLURP Algebra 341 Chapter 45 Putting It into Practice 343 Chapter 46 The CPO: Managing Probability Management 354 Chapter 47 A Posthumous Visit by My Father 364 Red Word Glossary 367 Notes 371 About the Author 382 Index 383 ...

Auteur

SAM L. SAVAGE is a Consulting Professor of Management Science and Engineering at Stanford University, and a Fellow of the Judge Business School at the University of Cambridge.

Texte du rabat

Praise for THE FLAW OF AVERAGES "Statistical uncertainties are pervasive in decisions we make every day in business, government, and our personal lives. Sam Savage's 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 . . . the Distribution String . . . represents a major breakthrough in the communication of risk and uncertainty." --Harry Markowitz, Nobel Laureate in Economics "This is a book written for laymen with enough interesting insights to engage even the most scholarly professional." --Douglas Hubbard, author of How to Measure Anything "Sam Savage is the Edward Tufte of risk." --Matthew Raphaelson, Executive Vice President, Wells Fargo A GROUNDBREAKING MUST-READ FOR ANYONE WHO MAKES BUSINESS DECISIONS IN THE FACE OF UNCERTAINTY In The Flaw of Averages, Sam Savage--known for his creative exposition of difficult subjects--describes common avoidable mistakes in assessing risk in the face of uncertainty. He explains why plans based on average assumptions are wrong, on average, in areas as diverse as finance, healthcare, accounting, the war on terror, and climate change. Savage refers to anachronistic statistical jargon as Red Words, which he defines as things that may not be uttered in a singles bar. Instead, he presents complex concepts in plain English (Green Words), backed up by interactive simulations at www.FlawofAverages.com, which connect the seat of the intellect to the seat of the pants. Savage also presents the emerging field of Probability Management aimed at curing the Flaw of Averages through more transparent communication of uncertainty and risk. Savage argues that this is a problem that must be solved if we are to improve the stability of our economy, and that we cannot repeat the recent mistakes of applying "steam era" statistics to "information age" risks.

Résumé
A must-read for anyone who makes business decisions that have a major financial impact Tomorrow's stock price, next month's sales, next year's costs these are all numbers we don't know yet. Yet everyday, we base our personal and business plans on these kinds of uncertainties.

Contenu

Foreword xv

Preface xvii

Acknowledgments xxi

Introduction Connecting the Seat of the Intellect to the Seat of the Pants 1
You cannot learn to ride a bicycle from a book,and I claim the same is true for coping with uncertainty. Paradoxically, this book attempts to dowhat it claims is impossible.

Foundations

Part 1 The Big Picture 9

Chapter 1 The Flaw of Averages 11
In planning for the future, uncertain outcomes are often replaced with single, so-called average numbers. This leads to a class of systematic errors that I call the Flaw of Averages, which explains among other things why forecasts are always wrong.

Chapter 2 The Fall of the Algebraic Curtain and Rise of the Flaw of Averages 22
The electronic spreadsheet brought the power of business modeling to tens of millions. In so doing, it also paved the way for an epidemic of the Flaw of Averages.

Chapter 3 Mitigating the Flaw of Averages 26
New technologies are illuminating uncertainty much as the lightbulb illuminates darkness. Probability Management is a scientific approach to harnessing these developments to cure the Flaw of Averages.

Chapter 4 The Wright Brothers Versus the Wrong Brothers 34
The success of the Wright Brothers' airplane was the result of carefully constructed models that they tested in their wind tunnel. Analogous models ca help us manage uncertainty and risk, but as we *saw in the financial crash of 2008, models can also be used to obfuscat…