Tyranny of Averages

Parent term
The tyranny of averages describes the often overlooked fact that the mean does not provide any information about the shape or skewness of a probability distribution.

  • Averages can often hide as much as they reveal
  • A typical measurement for the members of a dataset may not look like the average at all
  • Also need to look at a distribution's shape and skewness
  • Degree Distribution can help understand if average is a reflective statistic
  • Average works well when data samples are clustered around the mean
  • Average does not work well if there are outliers that skew the statistic

Illustrative Example of The Tyranny of Averages 
  • Assume 9 people with no savings are in a bar
  • Their average net  worth is $0
  • In walks a billionaire with $10 Billions in savings
  • The average of the people in the bar is now worth $1 Billion
  • In reality though, no one in the bar only has $1 Billion or close to it.
  • The single billionaire threw off the average
  • The median savings of $0 would be a more accurate reflection

Real World Investing Implications 
  • Be careful of economic statistics that use averages - they may be skewed
  • Ex.  Income inequality.  The super rich may be driving up average incomes, but in reality most people are getting pooer