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

ISBN-10: 1118073754
ISBN-13: 9781118073759
Edition: 2012
List price: $23.95 Buy it from $15.14
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Description: 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  More...

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Book details

List price: $23.95
Copyright year: 2012
Publisher: John Wiley & Sons Canada, Limited
Publication date: 3/26/2012
Binding: Paperback
Pages: 416
Size: 6.00" wide x 9.25" long x 1.25" tall
Weight: 1.056
Language: English

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

Preface
Acknowledgments
Introduction Connecting the Seat of the Intellect to the Seat of the Pants
Foundations
The Big Picture
The Flaw of Averages
The Fall of the Algebraic Curtain and Rise of the Flaw of Averages
Mitigating the Flaw of Averages
The Wright Brothers Versus the Wrong Brothers
The Most Important Instrument in the Cockpit
Five Basic MINDles for Uncertainty
MINDles Are to MINDs What HANDles Are to HANDs
Mindle 1: Uncertainty Versus Risk
Mindle 2: An Uncertain Number Is a Shape
Mindle 3: Combinations of Uncertain Numbers
I Come to Bury SIGMA, Not to Praise it
Mindle 4: Terri Dial and the Drunk in the Road
Who Was Jensen and Why Wasn't He Equal?
Mindle 5: Interrelated Uncertainties
Decisions and Information
Decision Trees
The Value of Information
The Seven Deadly Sins of Averaging
The Seven Deadly Sins of Averaging
The Flaw of Extremes
Simpson's Paradox
The Scholtes Revenue Fallacy
Taking Credit for Chance Occurrences
The Flaw of Averages in Finance
Your Retirement Portfolio
The Birth of Portfolio Theory: The Age of Covariance
When Harry Met Bill(y)
Mindles for the Financial Planning Client
Options: Profiting from Uncertainty
When Fischer and Myron Met Bob: Option Theory
Prices, Probabilities, and Predictions
Real Finance
Holistic Versus Hole-istic
Real Portfolios at Shell
Real Options
Some Gratuitous Inflammatory Remarks on the Accounting Industry
The Flaw of Averages in Supply Chains
The DNA of Supply Chains
A Supply Chain of DNA
Cawlfield's Principle
The Flaw of Averages and Some Hot Button Issues
The Statistical Research Group of World War II
Probability and the War on Terror
The Flaw of Averages and Climate Change
The Flaw of Averages in Health Care
Sex and the Central Limit Theorem
Toward a Cure for the Flaw of Averages
The End of Statistics as You Were Taught It
Visualization
Interactive Simulation: A New Lightbulb
Scenario Libraries: The Power Grid
The Fundamental Identity of SLURP Algebra
Putting It into Practice
The CPO: Managing Probability Management
A Posthumous Visit by My Father
Red Word Glossary
Notes
About the Author
Index

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