The flaw of averages: why we underestimate risk in the face of uncertainty

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.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 academicideal. . . . In this profound and entertaining book, Professor Savage shows how to make all this practical, practicable, and comprehensible.”—­Harry Markowitz, Nobel Laureate in Economics INDICE: Preface xvAcknowledgments xixIntroduction Connecting the Seat of the Intellect to the Seat of the Pants 1FOUNDATIONSPart 1 The Big Picture 9Chapter 1 The Flaw of Averages 11Chapter 2 The Fall of the Algebraic Curtain and Rise of the Flaw of Averages 22Chapter 3 Mitigating the Flaw of Averages 26Chapter 4 The Wright Brothers Versus the Wrong Brothers 34Chapter 5 The Most Important Instrument in the Cockpit 40Part 2 Five Basic MINDles for Uncertainty 45Chapter 6 MINDles Are to MINDs What HANDles Are to HANDs 49Chapter 7 Mindle 1: Uncertainty Versus Risk 52Chapter 8 Mindle 2: An Uncertain Number Is a Shape 55Chapter 9 Mindle 3: Combinations of Uncertain Numbers 67Chapter 10 I Come to Bury SIGMA, Not to Praise it 78Chapter 11 Mindle 4: Terri Dial and the Drunk in the Road 83Chapter 12 Who Was Jensen and Why Wasn’t He Equal? 91Chapter 13Mindle 5: Interrelated Uncertainties 98Part 3 Decisions and Information 109Chapter 14 Decision Trees 111Chapter 15 The Value of Information 118Part 4 The Seven Deadly Sins of Averaging 127Chapter 16 The Seven Deadly Sins of Averaging129Chapter 17 The Flaw of Extremes 133Chapter 18 Simpson’s Paradox 139Chapter 19 The Scholtes Revenue Fallacy 142Chapter 20 Taking Credit for Chance Occurrences 147APPLICATIONSPart 5 The Flaw of Averages in Finance 155Chapter 21 Your Retirement Portfolio 157Chapter 22 The Birth of Portfolio Theory: The Age of Covariance 163Chapter 23 When Harry Met Bill(y) 169Chapter 24 Mindles for the Financial Planning Client 175Chapter 25 Options: Profiting from Uncertainty 181Chapter 26 When Fischer and Myron Met Bob: Option Theory 192Chapter 27 Prices, Probabilities, and Predictions 200Part 6 Real Finance 213Chapter 28 Holistic Versus Hole-istic 215Chapter 29 Real Portfolios at Shell 222Chapter 30 RealOptions 228Chapter 31 Some Gratuitous Inflammatory Remarks on the AccountingIndustry 236Part 7 The Flaw of Averages in Supply Chains 245Chapter 32 The DNA of Supply Chains 247Chapter 33 A Supply Chain of DNA 254Chapter 34 Cawlfield’s Principle 257Part 8 The Flaw of Averages and Some Hot Button Issues 263Chapter 35 The Statistical Research Group of World War II 265Chapter 36 Probability and the War on Terror 272Chapter 37 The Flaw of Averages and Climate Change 289Chapter 38 The Flaw of Averages in Health Care 299Chapter 39 Sex and the Central Limit Theorem 307PROBABILITY MANAGEMENTPart 9 Toward a Cure for the Flaw of Averages 317Chapter 40 The End of Statistics as You Were Taught It 319Chapter 41 Visualization 324Chapter 42 Interactive Simulation: A New Lightbulb 328Chapter 43 Scenario Libraries: The Power Grid 332Chapter 44 The Fundamental Identity of SLURP Algebra 341Chapter 45 Putting It into Practice 343Chapter 46The CPO: Managing Probability Management 354Chapter 47 A Posthumous Visit by My Father 364Red Word Glossary 367Notes 371About the Author 382Index 383

• ISBN: 978-1-118-07375-9
• Editorial: John Wiley & Sons
• Encuadernacion: Rústica
• Páginas: 416
• Fecha Publicación: 18/04/2012
• Nº Volúmenes: 1
• Idioma: Inglés