Friday, November 20, 2009

Flaw of Averages followup: The Average Lie

The Simple Dollar has a great article about the The Average Lie. The reason why I bring up this article because a recent IEOR Tools blog commentator opined in an earlier post on the Flaw of Averages by Sam Savage. The commentator said Sam didn't bring up any good examples. Actually I think Sam did bring up a great example in personal finance of the fallacy of assuming x% average growth rate for the life of an investment vehicle. This article by The Simple Dollar is a great illustration of Sam's example.

After posting that article I could think of many different examples of the Flaw of Averages. Some that come to mind in industrial operations include average rate of production, average time to complete a task, average demand for a product. I have had to deal with each of these scenarios often having to come up with better suggestions to management to deal with the operational challenge other than using an average value. I would love to hear other great examples.

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