Sunday, April 18, 2010

The Flaw of Averages

For those who seek to "solve" the problem of risk through the calculation of a single numerical value (as in the mean, median, mode, variance, standard deviation, alpha, beta, power, value at risk, etc), I commend this video by Dr Sam L Savage, author of The Flaw of Averages (2009, John Wiley):

To understand and evaluate risk, decision-makers must consider a multitude of fundamental, descriptive, and inferential measures and indicators in comcomitance. The potential for misspecification (as in model risk) and misinterpretation (as in naivety) are great. Thus, risk management (including analysis) should be viewed and treated as a polyvalent task that defies commoditization and delegation in enterprise.


Graham Jeffery said...

Great clip. It's an even better book, which I recommend highly.

Anonymous said...

William, it is a great book. One milestone in my opinion that risk calculations are no more than crutches to support our inability to understand what we do.
Regards, Max

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