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

November 30, 2020
The Flaw of Averages: Why We Underestimate Risk in the Face of Uncertainty

A must-read for anyone who makes business decisions thathave a major financial impact.As the recent collapse on Wall Street shows, we are oftenill-equipped to deal with uncertainty and risk. Yet every day webase our personal and business plans on uncertainties, whether theybe next month’s sales, next year’s costs, or tomorrow’s stockprice. In The Flaw of Averages, Sam Savage­known for hiscreative exposition of difficult subjects­ describes commonavoidable mistakes in assessing risk in the face of uncertainty.Along the way, he shows why plans based on average assumptions arewrong, on average, in areas as diverse as healthcare, accounting,the War on Terror, and climate change. In his chapter on Sex andthe Central Limit Theorem, he bravely grasps the literary thirdrail of gender differences.Instead of statistical jargon, Savage presents complex conceptsin plain English. In addition, a tightly integrated web sitecontains numerous animations and simulations to further connect theseat of the reader’s intellect to the seat of their pants.The Flaw of Averages typically results when someoneplugs a single number into a spreadsheet to represent an uncertainfuture quantity. Savage finishes the book with a discussion of theemerging field of Probability Management, which cures this problemthough a new technology that can pack thousands of numbers into asingle spreadsheet cell.Praise for The Flaw of Averages“Statistical uncertainties are pervasive in decisions we makeevery day in business, government, and our personal lives. SamSavage’s lively and engaging book gives any interested reader theinsight and the tools to deal effectively with those uncertainties.I highly recommend The Flaw of Averages.”—William J. Perry, Former U.S. Secretary ofDefense“Enterprise analysis under uncertainty has long been an academicideal. . . . In this profound and entertaining book, ProfessorSavage shows how to make all this practical, practicable, andcomprehensible.”—­Harry Markowitz, Nobel Laureate inEconomics