Comments on: The Flaw of Averages http://allfinancialmatters.com/2006/10/09/the-flaw-of-averages/ A personal finance blog dedicated to discussing such topics as budgeting, asset allocation, 401K, IRA, cash flow, insurance, financial planning, portfolio management, and other areas in personal finance. Sat, 11 Feb 2012 20:32:19 +0000 hourly 1 http://wordpress.org/?v= By: traineeinvestor http://allfinancialmatters.com/2006/10/09/the-flaw-of-averages/comment-page-1/#comment-31809 traineeinvestor Wed, 11 Oct 2006 12:12:50 +0000 http://allthingsfinancialblog.com/?p=1232#comment-31809 The flaw of averages has important implications for financial planning. Basically, any plan which assumes or relies on "average" returns has a significant probability of failure. The flaw of averages has important implications for financial planning. Basically, any plan which assumes or relies on “average” returns has a significant probability of failure.

]]> By: samerwriter http://allfinancialmatters.com/2006/10/09/the-flaw-of-averages/comment-page-1/#comment-31689 samerwriter Tue, 10 Oct 2006 20:34:36 +0000 http://allthingsfinancialblog.com/?p=1232#comment-31689 Well, in this case the median is about as useless as the average. Or, look at this case. Let's say our fictional town has 3 people with the following net worths: 1: $0 2: $50,000 3: $157,000 The median is still $50K and the average is still $69K, but those numbers don't give you much of an idea of the true situation of the majority of the town's residents. From those numbers you would think the financial situation of this town's residents is similar to the town in the original post. But all this shows is that it's easy to come up with contrived examples. Statistics are easy manipulated by messing with the data set, and they aren't generally useful with a small data set. Well, in this case the median is about as useless as the average. Or, look at this case. Let’s say our fictional town has 3 people with the following net worths:

1: $0
2: $50,000
3: $157,000

The median is still $50K and the average is still $69K, but those numbers don’t give you much of an idea of the true situation of the majority of the town’s residents. From those numbers you would think the financial situation of this town’s residents is similar to the town in the original post.

But all this shows is that it’s easy to come up with contrived examples. Statistics are easy manipulated by messing with the data set, and they aren’t generally useful with a small data set.

]]> By: Charles http://allfinancialmatters.com/2006/10/09/the-flaw-of-averages/comment-page-1/#comment-31629 Charles Tue, 10 Oct 2006 14:36:51 +0000 http://allthingsfinancialblog.com/?p=1232#comment-31629 It's not so much that "statistics can be used to prove anything" but rather that most people know so little about statistics that they don't have the tools available to analize the validity of statements based on statistical data. We could also talk about the mode here (also 50K) or exclude outliers (1000K) and reanalyze the data. Ignornace of statistics (and math in general) is what keeps people buying $100 worth of lottery tickets or falling for schemes that tell them to "pick two consecutive numbers because they are more likely to occur." (Why has mathmatical literacy never become as important as language literacy? Sigh.) It’s not so much that “statistics can be used to prove anything” but rather that most people know so little about statistics that they don’t have the tools available to analize the validity of statements based on statistical data. We could also talk about the mode here (also 50K) or exclude outliers (1000K) and reanalyze the data. Ignornace of statistics (and math in general) is what keeps people buying $100 worth of lottery tickets or falling for schemes that tell them to “pick two consecutive numbers because they are more likely to occur.” (Why has mathmatical literacy never become as important as language literacy? Sigh.)

]]> By: Nick http://allfinancialmatters.com/2006/10/09/the-flaw-of-averages/comment-page-1/#comment-31622 Nick Tue, 10 Oct 2006 13:50:05 +0000 http://allthingsfinancialblog.com/?p=1232#comment-31622 Great post! It is amazing how numbers in the form of statistics can be used to prove anything if know one asks where the numbers can from. Great post! It is amazing how numbers in the form of statistics can be used to prove anything if know one asks where the numbers can from.

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