{"product_id":"the-flaw-of-averages-9781118073759","title":"The Flaw of Averages","description":"\u003cb\u003eBook Synopsis\u003c\/b\u003e\u003cbr\u003eA must-read for anyone who makes business decisions that have a major financial impact     Tomorrow's stock price, next month's sales, next year's costs   these are all numbers we don't know yet. Yet everyday, we base our personal and business plans on these kinds of uncertainties.\u003cbr\u003e\u003cbr\u003e\u003cb\u003eTable of Contents\u003c\/b\u003e\u003cbr\u003e\u003cp\u003eForeword xv\u003c\/p\u003e \u003cp\u003ePreface xvii\u003c\/p\u003e \u003cp\u003eAcknowledgments xxi\u003c\/p\u003e \u003cp\u003eIntroduction Connecting the Seat of the Intellect to the Seat of the Pants 1\u003cbr\u003e\u003ci\u003eYou cannot learn to ride a bicycle from a book,and I claim the same is true for coping with uncertainty. Paradoxically, this book attempts to dowhat it claims is impossible.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003e\u003cb\u003eFoundations\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e\u003cb\u003ePart 1 The Big Picture 9\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003eChapter 1 The Flaw of Averages 11\u003cbr\u003e\u003ci\u003eIn planning for the future, uncertain outcomes are often replaced with single, so-called average numbers. \u003c\/i\u003e\u003ci\u003eThis leads to a class of systematic errors that I call the Flaw of Averages, which explains among other \u003c\/i\u003e\u003ci\u003ethings why forecasts are always wrong.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003eChapter 2 The Fall of the Algebraic Curtain and Rise of the Flaw of Averages 22\u003cbr\u003e\u003ci\u003eThe electronic spreadsheet brought the power of business modeling to tens of millions. In so doing, it also \u003c\/i\u003e\u003ci\u003epaved the way for an epidemic of the Flaw of Averages.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003eChapter 3 Mitigating the Flaw of Averages 26\u003cbr\u003e\u003ci\u003eNew technologies are illuminating uncertainty much as the lightbulb illuminates darkness. \u003c\/i\u003e\u003ci\u003eProbability Management is a scientific approach to harnessing these developments to cure the Flaw of Averages.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003eChapter 4 The Wright Brothers Versus the Wrong Brothers 34\u003cbr\u003e\u003ci\u003eThe success of the Wright Brothers’ airplane was the result of carefully constructed models that they \u003c\/i\u003e\u003ci\u003etested in their wind tunnel. Analogous models ca help us manage uncertainty and risk, but as we \u003c\/i\u003e\u003ci\u003esaw in the financial crash of 2008, models can also be used to obfuscate.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003eChapter 5 The Most Important Instrument in the Cockpit 40\u003cbr\u003e\u003ci\u003eThe proper use of models, like the instruments in \u003c\/i\u003e\u003ci\u003ean airplane, is not obvious.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003e\u003cb\u003ePart 2 Five Basic Mindles for Uncertainty 45\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003eChapter 6 Mindles are to Minds What Handles are to Hands 49\u003cbr\u003e\u003ci\u003eJust as industrial designers develop handles to help us grasp the power of physics with our \u003c\/i\u003e\u003ci\u003ehands, informational designers develop Mindles (first syllable rhymes with “mind”) to help us grasp \u003c\/i\u003e\u003ci\u003ethe power of information with our minds. Section 2will provide some important Mindles for grasping \u003c\/i\u003e\u003ci\u003euncertainty.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003eChapter 7 Mindle 1: Uncertainty Versus Risk 52\u003cbr\u003e\u003ci\u003eThese two concepts are often used interchangeably but they shouldn’t be. Uncertainty is an objective \u003c\/i\u003e\u003ci\u003efeature of the universe, whereas risk is in the eye of the beholder.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003eChapter 8 Mindle 2: An Uncertain Number Is a Shape 55\u003cbr\u003e\u003ci\u003eEven graduates of statistics courses have a hard time visualizing uncertainty. A shape in the form of a \u003c\/i\u003e\u003ci\u003esimple bar graph, called the histogram, does the trick. Try running a simulation in your head or better yet, on your web browser at FlawOfAverages.com.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003eChapter 9 Mindle 3: Combinations of Uncertain Numbers 67\u003cbr\u003e\u003ci\u003eWhen uncertain numbers are added or averaged, the chance of extreme events goes down. I cover a case study in the film industry.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003eChapter 10 I Come to Bury Sigma, Not to Praise it 78\u003cbr\u003e\u003ci\u003eJust as the height and weight of a criminal suspect have been superseded by surveillance videos and \u003c\/i\u003e\u003ci\u003eDNA samples, sigma is pushing obsolescence.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003eChapter 11 Mindle 4: Terri Dial and the Drunk in the Road 83\u003cbr\u003e\u003ci\u003eA banking executive discovers the Strong Form of the Flaw of Averages: Average inputs don’t always \u003c\/i\u003e\u003ci\u003eresult in average outputs. Designing an incentive plan around your average employee is systematically \u003c\/i\u003e\u003ci\u003eerroneous.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003e\u003cb\u003eChapter 12 Who Was Jensen and Why Wasn’t He Equal? 91\u003cbr\u003e\u003c\/b\u003eThe Nuts and Bolts of the Strong Form of the Flaw of Averages\u003cb\u003e\u003cbr\u003e\u003c\/b\u003e\u003ci\u003eThis chapter shows how to identify the Flaw of Averages before it occurs by understanding your options and restrictions.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003eChapter 13 Mindle 5: Interrelated Uncertainties 98\u003cbr\u003e\u003ci\u003eInterrelated uncertainties are at the heart of modern portfolio theory. They are best understood in terms \u003c\/i\u003e\u003ci\u003eof scatter plots.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003e\u003cb\u003ePart 3 Decisions and Information 109\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003eChapter 14 Decision Trees 111\u003cbr\u003e\u003ci\u003eDecision trees are a powerful Mindle for thinking through decisions in the face of uncertainty.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003e\u003cb\u003eChapter 15 The Value of Information \u003c\/b\u003e\u003cb\u003eBecause There Isn’t Anything Else 118\u003cbr\u003e\u003c\/b\u003e\u003ci\u003eThe flip side of decision trees. Information is the complement of uncertainty. What is it worth to find things out?\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003e\u003cb\u003ePart 4 The Seven Deadly Sins of Averaging 127\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003eChapter 16 The Seven Deadly Sins of Averaging 129\u003cbr\u003e\u003ci\u003eSo here are the Seven Deadly Sins, all eleven of them. And the twelfth deadly sin is believing we won’t discover even more tomorrow.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003eChapter 17 The Flaw of Extremes 133\u003cbr\u003e\u003ci\u003eViewing uncertainties solely in terms of nonaverage outcomes also leads to devastatingly wrong answers and policy decisions.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003eChapter 18 Simpson’s Paradox 139\u003cbr\u003e\u003ci\u003eImagine a weight loss treatment that makes people lose weight on average, unless they are either male \u003c\/i\u003e\u003ci\u003eor female, in which case it makes them gain \u003c\/i\u003e\u003ci\u003eweight on average.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003eChapter 19 The Scholtes Revenue Fallacy 142\u003cbr\u003e\u003ci\u003eSuppose you have various product lines with different unit sales. The average unit sales times \u003c\/i\u003e\u003ci\u003ethe average profit per unit might be positive while your average profit might be negative.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003eChapter 20 Taking Credit for Chance Occurrences 147\u003cbr\u003e\u003ci\u003eIf you execute a marketing campaign and make a bunch of sales, how do you know the increase wasn’t just by chance?\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003e\u003cb\u003eApplications\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e\u003cb\u003ePart 5 The Flaw of Averages in Finance 155\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003eChapter 21 Your Retirement Portfolio 157\u003cbr\u003e\u003ci\u003eIf your retirement fund will last you 20 years given average returns, then you are as likely as not to suffer financial ruin before you get there.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003eChapter 22 The Birth of Portfolio Theory: The Age of Covariance 163\u003cbr\u003e\u003ci\u003eHarry Markowitz started a revolution in finance in the early 1950s by explicitly recognizing \u003c\/i\u003e\u003ci\u003erisk\/return trade-offs.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003eChapter 23 When Harry Met Bill(y) 169\u003cbr\u003e\u003ci\u003eBill Sharpe extended the work of Markowitz and brought it into widespread practice.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003eChapter 24 Mindles for the Financial Planning Client 175\u003cbr\u003e\u003ci\u003eHow the pros explain this stuff to their clients.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003eChapter 25 Options: Profiting from Uncertainty 181\u003cbr\u003e\u003ci\u003eOptions allow us to exploit uncertainty through an understanding of the Strong Form of the Flaw \u003c\/i\u003e\u003ci\u003eof Averages.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003eChapter 26 When Fischer and Myron Met Bob: Option Theory 192\u003cbr\u003e\u003ci\u003eThe theory of three economists led to the trillion-dollar derivatives industry.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003eChapter 27 Prices, Probabilities, and Predictions 200\u003cbr\u003e\u003ci\u003eThe new phenomenon of prediction markets is changing the way we perceive and report uncertain events, such as political races.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003e\u003cb\u003ePart 6 Real Finance 213\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003eChapter 28 Holistic Versus Hole-istic 215\u003cbr\u003e\u003ci\u003eWhen people invest in portfolios of oil exploration sites, they often use the hole-istic approach. That is, they rank the places to drill hole by hole, then start at the top and go down the list until they \u003c\/i\u003e\u003ci\u003erun out of money. This ignores the holistic effects of portfolios.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003eChapter 29 Real Portfolios at Shell 222\u003cbr\u003e\u003ci\u003eFor several years, Shell has been using Probability Management to manage its portfolios of petroleum \u003c\/i\u003e\u003ci\u003eexploration sites in a more holistic manner.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003eChapter 30 Real Options 228\u003cbr\u003e\u003ci\u003eAn example of a real option is a gas well in which you have the choice of whether or not to pump depending on the price of gas.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003eChapter 31 Some Gratuitous Inflammatory Remarks on the Accounting Industry 236\u003cbr\u003e\u003ci\u003eYou can’t rely on accountants to detect risks because generally accepted accounting principles are built on the Flaw of Averages.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003e\u003cb\u003ePart 7 The Flaw of Averages in Supply Chains 245\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003eChapter 32 The DNA of Supply Chains 247\u003cbr\u003e\u003ci\u003eThe inventory problem introduced in Chapter 1 is at the heart of all supply chains.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003eChapter 33 A Supply Chain of DNA 254\u003cbr\u003e\u003ci\u003eWhen stocking out is not an option.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003eChapter 34 Cawlfield’s Principle 257\u003cbr\u003e\u003ci\u003eA manager at Olin creates a simulation to get two divisions of his organization to work as a team and discovers a general principle in the process.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003e\u003cb\u003ePart 8 The Flaw of Averages and Some Hot Button Issues 263\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003eChapter 35 The Statistical Research Group of World War II 265\u003cbr\u003e\u003ci\u003eThe exciting environment in which my father became a statistician.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003eChapter 36 Probability and the War on Terror 272\u003cbr\u003e\u003ci\u003eTwo inescapable statistical trademarks of the war on terror are the problem of false positives and implications of Markov chains.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003eChapter 37 The Flaw of Averages and Climate Change 289\u003cbr\u003e\u003ci\u003eThe earth’s average temperature may actually be going down, not up, but you won’t be happy when you find out why. The Flaw of Averages permeates this issue.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003eChapter 38 The Flaw of Averages in Health Care 299\u003cbr\u003e\u003ci\u003eTreating the average patient is not healthy.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003eChapter 39 Sex and the Central Limit Theorem 307\u003cbr\u003e\u003ci\u003eWomen have a diversified portfolio of two X chromosomes, whereas men have only one. Apparently it makes a difference.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003e\u003cb\u003eProbability Management\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e\u003cb\u003ePart 9 Toward a Cure for the Flaw of Averages 317\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003eChapter 40 The End of Statistics as You Were Taught It 319\u003cbr\u003e\u003ci\u003eThe ninetheenth-century statisticians confirmed their theories by simulating uncertainty with dice, cards, and numbered balls. Today, computerized dice, cards, and balls are bypassing the very theories they were trying to confirm.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003eChapter 41 Visualization 324\u003cbr\u003e\u003ci\u003eVisual statistics provides a window into distributions. You need to see it to appreciate it.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003eChapter 42 Interactive Simulation: A New Lightbulb 328\u003cbr\u003e\u003ci\u003eImagine simulating 100,000 rolls of a die before your finger leaves the Enter key. A new technology \u003c\/i\u003e\u003ci\u003edoes for probability distributions what the spreadsheet did for numbers.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003eChapter 43 Scenario Libraries: The Power Grid 332\u003cbr\u003e\u003ci\u003eNew data structures allow the results of simulations to be added together like numbers, providing a more practical approach to enterprisewide risk models.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003eChapter 44 The Fundamental Identity of SLURP Algebra 341\u003cbr\u003e\u003ci\u003eThis looks like math. Feel free to skip it.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003eChapter 45 Putting It into Practice 343\u003cbr\u003e\u003ci\u003eThe technology surrounding Probability Management is improving fast, and recent breakthroughs promises to make it more accessible than ever.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003eChapter 46 The CPO: Managing Probability Management 354\u003cbr\u003e\u003ci\u003eThe CPO must strike the correct balance between transparency of presentation, data collection, and \u003c\/i\u003e\u003ci\u003estatistical rigor.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003eChapter 47 A Posthumous Visit by My Father 364\u003cbr\u003e\u003ci\u003eSome comments from the hereafter.\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003eRed Word Glossary 367\u003c\/p\u003e \u003cp\u003eNotes 371\u003c\/p\u003e \u003cp\u003eAbout the Author 382\u003c\/p\u003e \u003cp\u003eIndex 383\u003c\/p\u003e","brand":"John Wiley \u0026 Sons Inc","offers":[{"title":"Default Title","offer_id":48866364784983,"sku":"9781118073759","price":17.1,"currency_code":"GBP","in_stock":true}],"thumbnail_url":"\/\/cdn.shopify.com\/s\/files\/1\/0817\/1739\/5799\/files\/9781118073759.jpg?v=1722278297","url":"https:\/\/bookcurl.com\/products\/the-flaw-of-averages-9781118073759","provider":"Book Curl","version":"1.0","type":"link"}