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

3.84  ·  Rating details ·  464 ratings  ·  34 reviews
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, Sa ...more
Hardcover, 392 pages
Published June 1st 2009 by Wiley (first published May 13th 2009)
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Average rating 3.84  · 
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Oct 02, 2011 rated it really liked it
If you've read this book you'll find it quite ironic that I'm giving it a rating of 4. A real rating of the book would look like this:

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Syed Ashrafulla
Sam Savage's flaw in the Law of Averages is roughly two-fold: dependence between variables and nonlinearity in the payoff. He forgets about the big one (small samples & non-Gaussianity kill the law), but that's not where I soured. I soured with his cutesy attempt to make probability accessible to everyone. I just don't like SIPs and SLURPs and whatever else is being used to just describe realizations of a random variable.

I understand, statistics is in my expertise, so I'm a bit biased. But come
Jul 23, 2012 rated it did not like it
I was tremendously disappointed with this book. I got the false impression that it would focus on statistics in all aspects of life -- instead it is on discussing business cases, which makes it rather boring. In addition, statistical principles are discussed in very lay terms, without any of the actualy interesting mathematical details.
“Consider the state of a drunk, wandering around on a busy highway. His average position is the centerline, so the state of the drunk at his average position is alive, but the average state of the drunk is dead.” Turn on your computer, picture-google “The flaw of averages” and take a look at the brilliant picture that illustrates the quotation above. The insight behind this picture could have saved investors a lot of grief during financial history. Sam Savage is a consulting professor of managem ...more
John Petrocelli
Nov 28, 2017 rated it liked it
Review: Opted not to read pages 173-243 (much of which focuses on applications in Finance and Real Finance - probably useful advice for investing, but very boring). The book has a few nice examples of how people overuse and abuse averages, and show how they can be nothing like what people actually experience (e.g., retirement funds over 20 years). However, the book becomes increasingly focused on finance and the stock market, and increasingly boring. Savage's writing style is slow and can put mo ...more
Nov 08, 2020 rated it it was ok
The first half of the book was insightful and offered good perspectives on the analysis of data and how to interpret results from different angles. The basic lesson of the book was that we shouldn't rely solely on averages and should instead assess the upper and lower ranges of results as well as understanding the impacts of making decisions based on trends and probabilities.
I feel like the core theory of the book could have probably been explained in a long form blog post. It's not a particula
Sep 10, 2018 rated it it was amazing  ·  review of another edition
Don’t just check the book’s score; check the variability of it too

This is an excellent and mostly easy to read book on common traps we fall in by guiding our decisions using a single figure, mostly the average of the variable of interest. The examples given make the flaws become vivid. Prof Savage introduces several memorable terms in English, making it more efficient to share ideas on uncertainty. The terms that contradicted the beginnings of the book are SIP and SLURP; difficult to remember. I
Johan Dahlbäck
Dec 13, 2018 rated it really liked it
The average value disease is alive and well in management. I knew it before and I see it even clearlier after reading this book. Getting from taking mean values for truth to using distribution is a long way to go and Sam Savage gives you a lot of help.

Anyone who makes ANY business decision should know some statistics and could make good use of this book. It helps to know math, but you don't have to to get the points in the book.

I liked the chapters about options and the "mindles" most. The cha
Oct 09, 2019 rated it liked it
A layman's version of the problems underlying the usage of the average without recognizing the variation in that average. Uses a lot of examples from financial investments and probability but there are a few other examples. Written in a more irreverent tone with many references to pop culture items such as movies. Good read if you don't understand the important of variation and uncertainty in statistics. ...more
Dec 20, 2020 rated it it was ok
This is the sort of concept that would make for a great article and just gets dragged on far too long to be a book. The main idea is extremely important for anyone in the position to make business decisions and how the mean, probably our favorite statistic, can be extremely misleading and cause us to make poor decisions. Still, I found myself dragging my feet through many of the sections of this book until finally giving up at the halfway point.
I was recommended this book by one of my Operations Research Professor's and found it to be pretty entertaining while educational. I think for someone who isn't familiar with Operations Research or Statistics would find this book much more insightful than me, regardless I still enjoyed it. ...more
Oct 24, 2019 rated it it was amazing
Jun 17, 2020 rated it did not like it
What a disappointment!!!!
Fernando Cuenca
Aug 21, 2020 rated it it was ok
The book succeeds in presenting the pitfalls of using just averages to make decisions, but I'd argue that it could have been done in less than its 300+ pages. ...more
Johanna Rothman
Dec 01, 2020 rated it it was amazing  ·  review of another edition
I did not expect to enjoy a book about averages. I loved it! Not only did I learn ways to discuss why averages don't work, I have other alternatives.

A great book.
Mattia Battiston
Fantastic Read! Whenever faced with uncertainties use distributions and simulations, not averages.

I work in IT - software development - and I've always had to deal with plans and estimates. This book explains with extreme clarity why the traditional way of using averages for such reasons is wrong in so many ways!

I already knew the saying that you're not meant to use averages as they are wrong half the time, but this book still opened my eyes on the real reasons behind it.
Some of my favourite qu
Brad Felix
Feb 11, 2015 rated it it was amazing
I'd recommend this book to anyone who works for a corporation that uses numbers.

In my professional experience, I've found that managers often ask for your best prediction on some uncertain outcome and when you try to explain all the underlying variables and distributions of those variables that could influence the outcome - they typically reply with an incredulous "Give me a number!" Without a sophisticated way to model or simulate the results, most analysts are left to finding the average of h
Dec 15, 2012 rated it liked it
The book is a great introduction to some simple concepts of flaw of averages. The first half of the book does a great job in explaining the flaws of averages such as Jensen's inequality and some application of these flaws in real life. However the author keeps on repeating the same concept over and over again throughout the book in different domains such as finance, operations and trading. Most of the concepts covered in the book would be covered theoretically in the undergraduate statistics cou ...more
Abe Farag
Aug 17, 2015 rated it it was amazing
loved this book. For my it was really eye opening to see so many ways that well intention-ed management direction could result in such poor operational outcomes. So many project management decisions and directions when designing new hardware, software, or physical products are related to asking for and executing strategy related to guesses about the future. The Flaw of averages spells out some common pitfalls in those guesses.
In my experience managing product design projects in for technology a
May 24, 2010 rated it it was amazing
Currently, a tectonic shift is occurring in the way statistics, probability, and simulations are being used for making decisions in the face of uncertainty. With this book, Professor Savage has captured a few of the core elements of this shift, has provided some history, and has pointed towards some future directions. Given how dry these topics can be, he has done well to make the book approachable and entertaining.

While the book meanders a bit, its principles are powerful. Interactive simulatio
Sep 14, 2010 rated it liked it
I usually called averages 'the curse of the average' because what does average really tell you without knowing the distribution shape? How often do people add averages (oops, unless the sample size is coincidentally the same).

The author advocates 'probability management' and creating a model that will run random tests using selected probability distribution functions.

The book's points are very good. Some one familiar with the 'theory of constraints' (like in The Goal, or It's Not Luck, or Crit
Nov 16, 2013 rated it it was amazing
This is a great book - if you want to understand why humans are almost always wrong when they make estimates. Dr. Savage looks at the way statistics has been and is being taught and points out how the advent and now common use of the digital computer makes much of the current pedagogy obsolete. Likewise, he offers real, applied examples of how variance and risk assessment can and are being used.

I enjoyed this book enough that I've given copies to a number of colleagues, clients, and business as
Tyan T
Sep 28, 2020 rated it liked it
If you’re familiar with statistics, this book is a little repetitive due to the fact that it’s meant to simplify concepts to an audience without a background in statistics. That being said, there is one section in particular that I truly enjoyed - hot button topics with the flaw of averages and I thought it made the entire book worth the read. The last part of the book was confusing which was disappointing because Savage seemed to do a good job in simplifying concepts up to that point. Nonethele ...more
Brandon Carlson
Dec 16, 2009 rated it liked it
Was excited about this one. It has some good points about how using averages is a good way to fail and how using probabilities and Monte Carlo simulations produce better results, but it just didn't wow me all that much. It came highly recommended from others and, possibly would have been better had I not read "How to Measure Anything" first. Seems to be a bit of overlap between the two. The author tries to steer us away from big words used in statistics to make people sound smart, but found that ...more
Apr 02, 2010 rated it liked it
I only gave it 3 stars because of the lack of structure. The book starts out great --- then meanders into interesting, yet not so cohesive sections. However, I really like the concepts presented and think there's quite a bit of value to this approach. I recommend (especially the first half) to anyone that deals with making decisions in the face of uncertainty. ...more
Kortney Korthanke
This book was required reading for an MBA class. The information was good...relevant to the the class. However, I feel the information could be said fewer words...much fewer. If you are a numbers and statistics person you may find all the supporting evidence fascinating. I was wishing there were Cliffs Notes.
Dec 03, 2011 rated it liked it
This was a super worthwhile read. It is a highly accessible read and is very thought provoking. Highly recommended. So much so that I'll read it again in short order to ensure the concepts are connected to the seat of my pants (a metaphor from the book, which you'll have to read to understand...). ...more
Mar 27, 2013 rated it it was amazing

It's an eerie yet comforting feeling reading people discuss this book. I had the chance of working on a research project and take a course by this professor. Good book, especially for the layperson, (which although we like to pretend we're not,we all are inside). Good basic concepts and the big take away is that life is a distribution, never settle on a number. :)
Feb 16, 2010 rated it liked it
An interesting book about how much averages show up in our everyday world, and how often they are not a good number to follow. Not the best book about such things, the narrative is not as engaging as something like "Freakanomics". But the information about the stockmarket is very interesting. ...more
Jul 09, 2012 rated it liked it
This book is very intriguing, it is a challenge to understand and twice I stopped reading and tried to resume. I believe that the concept of averages and the concept of probability are very relevant to our everyday life. I wish I had more time for this book and plan to go back to it.
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Sam L. Savage is a Consulting Professor of Management Science and Engineering at Stanford University, and a Fellow of the Judge Business School at the University of Cambridge.

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“The five stages of model development. —Donald Knuth, Stanford computer scientist Knuth discovered that computer program development goes through five stages. These steps also apply to building models, and I rigorously adhere to them in my consulting work. 1. Decide what you want the model to do. 2. Decide how to build the model. 3. Build the model. 4. Debug the model. 5. Trash stages 1 through 4 and start again, now that you know what you really wanted in the first place. Once you realize that step 5 is inevitable, you become more willing to discard bad models early rather than continually to patch them up. In fact, I recommend getting to step 5 many times by building an evolving set of prototypes. This is consistent with an emerging style of system development known as Extreme Programming.2 To get a large model to work you must start with a small model that works, not a large model that doesn’t work. —Alan Manne, Stanford energy economist” 1 likes
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