The Flaw of Averages

Preface xv
Acknowledgments xix
Introduction Connecting the Seat of the Intellect to the Seat of the Pants 1

FOUNDATIONS

Part 1 The Big Picture 9
Chapter 1 The Flaw of Averages 11
Chapter 2 The Fall of the Algebraic Curtain and Rise of the Flaw of Averages 22
Chapter 3 Mitigating the Flaw of Averages 26
Chapter 4 The Wright Brothers Versus the Wrong Brothers 34
Chapter 5 The Most Important Instrument in the Cockpit 40

Part 2 Five Basic MINDles for Uncertainty 45
Chapter 6 MINDles Are to MINDs What HANDles Are to HANDs 49
Chapter 7 Mindle 1: Uncertainty Versus Risk 52
Chapter 8 Mindle 2: An Uncertain Number Is a Shape 55
Chapter 9 Mindle 3: Combinations of Uncertain Numbers 67
Chapter 10 I Come to Bury SIGMA, Not to Praise it 78
Chapter 11 Mindle 4: Terri Dial and the Drunk in the Road 83
Chapter 12 Who Was Jensen and Why Wasn t He Equal? 91
Chapter 13 Mindle 5: Interrelated Uncertainties 98

Part 3 Decisions and Information 109
Chapter 14 Decision Trees 111
Chapter 15 The Value of Information 118

Part 4 The Seven Deadly Sins of Averaging 127
Chapter 16 The Seven Deadly Sins of Averaging 129
Chapter 17 The Flaw of Extremes 133
Chapter 18 Simpson s Paradox 139
Chapter 19 The Scholtes Revenue Fallacy 142
Chapter 20 Taking Credit for Chance Occurrences 147

APPLICATIONS

Part 5 The Flaw of Averages in Finance 155
Chapter 21 Your Retirement Portfolio 157
Chapter 22 The Birth of Portfolio Theory: The Age of Covariance 163
Chapter 23 When Harry Met Bill(y) 169
Chapter 24 Mindles for the Financial Planning Client 175
Chapter 25 Options: Profiting from Uncertainty 181
Chapter 26 When Fischer and Myron Met Bob: Option Theory 192
Chapter 27 Prices, Probabilities, and Predictions 200

Part 6 Real Finance 213
Chapter 28 Holistic Versus Hole–istic 215
Chapter 29 Real Portfolios at Shell 222
Chapter 30 Real Options 228
Chapter 31 Some Gratuitous Inflammatory Remarks on the Accounting Industry 236

Part 7 The Flaw of Averages in Supply Chains 245
Chapter 32 The DNA of Supply Chains 247
Chapter 33 A Supply Chain of DNA 254
Chapter 34 Cawlfield s Principle 257

Part 8 The Flaw of Averages and Some Hot Button Issues 263
Chapter 35 The Statistical Research Group of World War II 265
Chapter 36 Probability and the War on Terror 272
Chapter 37 The Flaw of Averages and Climate Change 289
Chapter 38 The Flaw of Averages in Health Care 299
Chapter 39 Sex and the Central Limit Theorem 307

PROBABILITY MANAGEMENT

Part 9 Toward a Cure for the Flaw of Averages 317
Chapter 40 The End of Statistics as You Were Taught It 319
Chapter 41 Visualization 324
Chapter 42 Interactive Simulation: A New Lightbulb 328
Chapter 43 Scenario Libraries: The Power Grid 332
Chapter 44 The Fundamental Identity of SLURP Algebra 341
Chapter 45 Putting It into Practice 343
Chapter 46 The CPO: Managing Probability Management 354
Chapter 47 A Posthumous Visit by My Father 364

Red Word Glossary 367
Notes 371
About the Author 382
Index 383