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

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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 Savage-known 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 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

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Product details

  • Paperback | 416 pages
  • 152.4 x 226.06 x 30.48mm | 385.55g
  • John Wiley & Sons Inc
  • New York, United States
  • English
  • Reprint
  • ill
  • 1118073754
  • 9781118073759
  • 193,177

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Back cover copy

"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.

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About Sam L. Savage

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.

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