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

by Savage, Sam L.; Danziger, Jeff; Markowitz, Harry M.

• ISBN13: 9780471381976
• ISBN10: 0471381977
• Format: Hardcover
• Copyright: 2009-06-09
• Publisher: Wiley

Summary

Tomorrow's temperature, next week's sales, next month's stock price, next year's costs--these are all numbers we don't know yet. Everyday we base our personal and business plans on these kinds of uncertainties and as the financial collapse of Orange County, Barings Bank and Long Term Capital show, we are often ill-equipped to deal effectively with this uncertainty. The problem is that even graduates of statistics courses don't understand the fundamental concepts of uncertainty. This book enables readers to understand the elements of "statistics" vital to our everyday dealings with uncertainty.

Author Biography

Zhongwu Guo is a Professor of Chemistry at Wayne State University. The winner of the American Chemical Society's 2005 New Investigator Award in Carbohydrate Chemistry, Dr. Guo serves on the editorial board of the Journal of Carbohydrate Chemistry, speaks regularly at international conferences, and has authored more than ninety peer-reviewed publications.

Geert-Jan Boons is a Franklin Professor of Chemistry at the Complex Carbohydrate Research Center (CRCR) of the University of Georgia. The winner of the European Carbohydrate Association's Carbohydrate Research Award for Creativity in Carbohydrate Science, and the American Chemical Society's Horace Isbell Award, Dr. Boons serves on the editorial boards of Journal of Carbohydrate Chemistry and Advances in Carbohydrate Chemistry and Biochemistry.

Table of Contents

Preface	p. xv
Acknowledgments	p. xix
Introduction Connecting the Seat of the Intellect to the Seat of the Pants	p. 1
Foundations
The Big Picture	p. 9
The Flaw of Averages	p. 11
The Fall of the Algebraic Curtain and Rise of the Flaw of Averages	p. 22
Mitigating the Flaw of Averages	p. 26
The Wright Brothers Versus the Wrong Brothers	p. 34
The Most Important Instrument in the Cockpit	p. 40
Five Basic MINDIes for Uncertainty	p. 45
MINDIes Are to MINDs What HANDIes Are to HANDs	p. 49
Mindle 1: Uncertainty Versus Risk	p. 52
Mindle 2: An Uncertain Number Is a Shape	p. 55
Mindle 3: Combinations of Uncertain Numbers	p. 67
I Come to Bury Sigma, Not to Praise it	p. 78
Mindle 4: Terri Dial and the Drunk in the Road	p. 83
Who Was Jensen and Why Wasn't He Equal?	p. 91
The Nuts and Bolts of the Strong Form of the Flaw of Averages
Mindle 5: Interrelated Uncertainties	p. 98
Decisions and Information	p. 109
Decision Trees	p. 111
The Value of Information	p. 118
Because There Isn't Anything Else
The Seven Deadly Sins of Averaging	p. 127
The Seven Deadly Sins of Averaging	p. 129
The Flaw of Extremes	p. 133
Simpson's Paradox	p. 139
The Scholtes Revenue Fallacy	p. 142
Taking Credit for Chance Occurrences	p. 147
Applications
The Flaw of Averages in Finance	p. 155
Your Retirement Portfolio	p. 157
The Birth of Portfolio Theory: The Age of Covariance	p. 163
When Harry Met Bill(y)	p. 169
Mindles for the Financial Planning Client	p. 175
Options: Profiting from Uncertainty	p. 181
When Fischer and Myron Met Bob: Option Theory	p. 192
Prices, Probabilities, and Predictions	p. 200
Real Finance	p. 213
Holistic Versus Hole-istic	p. 215
Real Portfolios at Shell	p. 222
Real Options	p. 228
Some Gratuitous Inflammatory Remarks on the Accounting Industry	p. 236
The Flaw of Averages in Supply Chains	p. 245
The DNA of Supply Chains	p. 247
A Supply Chain of DNA	p. 254
Cawlfield's Principle	p. 257
The Flaw of Averages and Some Hot Button Issues	p. 263
The Statistical Research Group of World War II	p. 265
Probability and the War on Terror	p. 272
The Flaw of Averages and Climate Change	p. 289
The Flaw of Averages in Health Care	p. 299
Sex and the Central Limit Theorem	p. 307
Probability Management
Toward a Cure for the Flaw of Averages	p. 317
The End of Statistics as You Were Taught It	p. 319
Visualization	p. 324
Interactive Simulation: A New Lightbulb	p. 328
Scenario Libraries: The Power Grid	p. 332
The Fundamental Identity of SLURP Algebra	p. 341
Putting It into Practice	p. 343
The CPO: Managing Probability Management	p. 354
A Posthumous Visit by My Father	p. 364
Red Word Glossary	p. 367
Notes	p. 371
About the Author	p. 382
Index	p. 383
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