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The Flaw of Averages: Why We Underestimate Risk in the Face of Uncertainty Paperback – March 26, 2012
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From the Inside Flap
Savage begins by providing a basis for intuitively grasping and visualizing risk and uncertainty, using simple everyday props such as game-board spinners and dice. He refers to such statistical jargon as standard deviation and covariance as Red Words, and instead uses straightforward, everyday language throughout the book. He does not assume any statistical background on the part of the reader, but claims that for those with extensive training in the field, the first section of the book will repair the damage. He then describes how risk and uncertainty are handled in the field of finance, where the Flaw of Averages was first systematically conquered by Modern Portfolio Theory. Savage describes how the recenteconomic turmoil was caused in part by clinging blindly to this early work while not adhering to its fundamental principles. He then shows how these principles still form an excellent foundation for managing uncertainty and risk in other areas of industry and government, and provides examples in supply chain management, project portfolios, national defense, healthcare, climate change, and even sex.
In the book’s final section, Savage reveals current developments in the emerging field of Probability Management—a path towards increased transparency and a potential cure for the Flaw of Averages. Finally, the book includes a Red Word Glossary that defines statistical terms in plain English to assist readers in defending themselves against those wielding technical mumbo jumbo.
The goal of The Flaw of Averages is to help you make better judgments involving uncertainty and risk, both when you have the leisure to deliberate, and, more importantly, when you don’t. Its approach of a more transparent representation of uncertainty is helping people and some big companies to make better decisions today. --This text refers to the Unknown Binding edition.
From the Back Cover
"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.
More About the Author
In 2008, Sam invented the Distribution String, which, according to Nobel Laureate Harry Markowitz, "represents a major breakthrough in the communication of risk and uncertainty."
Sam also authored Decision Making with Insight, a text and spreadsheet software based on his classes in Interactive Management Science at Stanford.
Sam consults and lectures extensively to industry with an emphasis on explaining analytical concepts in experiential terms, or "connecting the seat of the intellect to the seat of the pants," as he puts it. Because of his interactive and intuitive presentations, he has been called "The Edward Tufte of Risk."
Top Customer Reviews
The essence of the book is that you should not use an average number in your predictions / forecasts / etc. Rather, you should use a distribution (e.g., simulations) instead. More specifically, he recommends the use of "Probability Management" which is his brainchild - basically boiling down to sharing probability distributions that are "certified" by designated specialists in the organization. This ensures that your work takes interrelationships into account, whereas separate simulations might miss the boat.
The main problem with the book, in my opinion, is that he talks far too much about the problem and far too little about the solution. He spends chapter after chapter talking about where the problem exists (or previously did exist), but doesn't give much in the way of details for the alternative. Even when the alternative is discussed, it is rarely in enough detail to glean any real kind of information about the solution to the problem other than a cursory overview.
The book also includes a lot of superfluous chapters that don't seem to fit with the book.Read more ›
Experts (and I consider myself one) will learn some new things and, more important, learn effective ways to explain things they already know. Novices will learn what they need, and sharpen their thinking skills. People in between will unlearn a lot of nonsense, and replace it with good stuff, and get the confidence to ignore self-proclaimed experts with dense jargon and impenetrable formulas. Key concepts are reduced to easy-to-remember "mindles." There are examples from most areas of finance, including some quite advanced, and business; with a few from other fields. What more could you want?
Well, one more thing, but it's impossible. The author is the son of Jimmie Savage, and I consider his The Foundations of Statistics one of the great accomplishments of human thought. It was his intellectual precision and genius, and those of a few other people, that allows statistics to be made simple. Before that work, people were impossibly confused about the basics. It would have been nice to see that acknowledged instead of ridiculed.
However, I realize so many people are traumatized and intimidated by statistics that it takes a little iconoclasm to motivate them.Read more ›
Savage criticizes what he calls "steam era" concepts of statistics which most stats courses seem stuck in and introduces decision making under uncertainty in a way that is much more welcoming than most books on this topic. I suspect that if more people had a professor like Sam Savage as their first mentor on statistics, there would be far fewer people with bad memories of that course.
His approach is all about avoiding intimidating terminology and getting hung up on esoteric concepts. In particular, he explains the concepts of Monte Carlo simulations in a way that might just get the reader excited about the power of the tool. He is not only an expert in MC simulations himself (he has developed many new innovations in the method) but is also an expert in how to explain it to a wide audience.
This is a book written for laymen with enough interesting insights to engage even the most scholarly professional.
In any case, the author's prose shouts "management consultant", and the book is a collection of marketing materials for him and colleagues (many of whom appear to be in the business of selling Excel add-ons). If you want to be able to reason about the world, think, and learn some mathematics (not for the facts as much as to learn how to think).Read more ›
Most Recent Customer Reviews
This book was required for a business decision analysis class, but a great read none the less.Published 8 months ago by Terrance Kirkwood
We teach statistics at www.GraduateTutor.com and other business subjects to MBA students and find that the average is probably the most USED and MISUSED statistical parameter! Read morePublished 11 months ago by Senith Mathews
Easy to read. Great fundamental principles that elucidate the flaw of averages. Can be used as a tool across many industries.Published 12 months ago by JS
I didn't understand my college course on statistics for engineers, but I understood the presentation in this book.Published 18 months ago by Richard
Absolute best, executive-ready descriptions and examples of fatal traps and what to do about them that I've ever read. I can't recommend this book enough.Published 19 months ago by Scott McCaig
This is a well written even entertaining book on one of life's essentials - effectively managing risk. A must read.Published 24 months ago by Dr Anthony Sive
.... making it practical, like learning to ride a bike rather than the physics that describes the theory of how to balance and move a bike forward at the same time...Published on January 19, 2014 by K.J.