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.
Author: Sam L. Savage
Publisher: John Wiley & Sons
Category: Business & Economics
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 Savageknown 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
Author: Richard De NeufvillePublish On: 2011-08-12
Appendix A : Flaw of Averages The term “ Flaw of Averages ” refers to the widespread — but mistakenassumption that evaluating a project around average conditions gives a correct result . This way of thinking is wrong except in the few ...
Author: Richard De Neufville
Publisher: MIT Press
A guide to using the power of design flexibility to improve the performance of complex technological projects, for designers, managers, users, and analysts. Project teams can improve results by recognizing that the future is inevitably uncertain and that by creating flexible designs they can adapt to eventualities. This approach enables them to take advantage of new opportunities and avoid harmful losses. Designers of complex, long-lasting projects—such as communication networks, power plants, or hospitals—must learn to abandon fixed specifications and narrow forecasts. They need to avoid the “flaw of averages,” the conceptual pitfall that traps so many designs in underperformance. Failure to allow for changing circumstances risks leaving significant value untapped. This book is a guide for creating and implementing value-enhancing flexibility in design. It will be an essential resource for all participants in the development and operation of technological systems: designers, managers, financial analysts, investors, regulators, and academics. The book provides a high-level overview of why flexibility in design is needed to deliver significantly increased value. It describes in detail methods to identify, select, and implement useful flexibility. The book is unique in that it explicitly recognizes that future outcomes are uncertain. It thus presents forecasting, analysis, and evaluation tools especially suited to this reality. Appendixes provide expanded explanations of concepts and analytic tools.
The “flaw of averages” refers to the idea that we should not base decisions only on the average values of the input parameters. If we do that, we may miss important opportunities or major risks that average values mask.
Author: David Geltner
Publisher: John Wiley & Sons
Category: Business & Economics
Provides a revolutionary conceptual framework and practical tools to quantify uncertainty and recognize the value of flexibility in real estate development This book takes a practical "engineering" approach to the valuation of options and flexibility in real estate. It presents simple simulation models built in universal spreadsheet software such as Microsoft Excel®. These realistically reflect the varying and erratic sources of uncertainty and price dynamics that uniquely characterize real estate. The text covers new analytic procedures that are valuable for existing properties and enable a new, more profitable perspective on the planning, design, operation, and evaluation of large-scale, multi-phase development projects. The book thereby aims to significantly improve valuation and investment decision making. Flexibility and Real Estate Valuation under Uncertainty: A Practical Guide for Developers is presented at 3 levels. First, it introduces and explains the concepts underlying the approach at a basic level accessible to non-technical and non-specialized readers. Its introductory and concluding chapters present the important “big picture” implications of the analysis for economics and valuation and for project design and investment decision making. At a second level, the book presents a framework, a roadmap for the prospective analyst. It describes the practical tools in detail, taking care to go through the elements of the approach step-by-step for clarity and easy reference. The third level includes more technical details and specific models. An Appendix discusses the technical details of real estate price dynamics. Associated web pages provide electronic spreadsheet templates for the models used as examples in the book. Some features of the book include: • Concepts and tools that are simple and accessible to a broad audience of practitioners; • An approach relevant for all development projects; • Complementarity with the author's Commercial Real Estate Analysis & Investments—the most-cited real estate investments textbook on the market. Flexibility and Real Estate Valuation under Uncertainty: A Practical Guide for Developers is for everyone studying or concerned with the implementation of large-scale or multi-phase real estate development projects, as well as property investment and valuation more generally.
The common practice of reducing an uncertainty to a single best guess eliminates a lot of information, which leads to the flaw of averages, a set of systematic errors that occur when a single number, usually an average, is substituted for a ...
Author: Philip Fahringer
The common practice of reducing an uncertainty to a single best guess eliminates a lot of information, which leads to the flaw of averages, a set of systematic errors that occur when a single number, usually an average, is substituted for a distribution. Interactive simulation provides intuitive risk dashboards that can be used to detect and manage hidden risks, even for those with no statistical training. This article is accompanied by an interactive simulation model in Excel.
The flaw of averages and the pitfalls of ignoring variablity in attribute interpretations TAPAN MUKERJI and GARY MAVKO , Stanford University , Stanford , USA Figure 7 : Bivariate probability den- sity functions ( pdfs.
The cumulative graph shows that the average cost is almost $ 200 with a 20 % chance of a cost over $ 400 . ... I refer to this widely held misconception as the Flaw of Averages ( Savage 2000 , 2002 ) . With this in mind we will answer ...
Author: Sam L. Savage
Publisher: Cengage Learning
Category: Affaires - Logiciels
Dr. Sam Savage, who's recognized as a leading innovator in management science education, provides the most hands-on , practical introduction to methods of decision making. This book and accompanying suite of Excel add-ins for quantitative analysis covers Monte Carlo simulation, decision trees, queuing simulations, optimization, Markov chains, and forecasting. The Insight add-ins have been developed over several years by the author.
This example shows what can happen if you make a capital investment in capacity based on average demand . ... The flaw of averages in this case dictates that average profit is less than the profit associated with average demand .
Flaw of averages M Statistical intuition is an essential skill for risk managers but , argues David Rowe , don't assume that other business professionals share such intuition , and beware of overconfidence in our own ost risk managers ...