We often need to make decisions. Some decisions we can make in our heads — "should I buy 6 eggs or a dozen?". But many decisions we can&#x

The Flaw of Averages

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2024-05-14 07:30:04

We often need to make decisions. Some decisions we can make in our heads — "should I buy 6 eggs or a dozen?". But many decisions we can't — "should I buy a house or rent?" — so we need tools to help us think: models.

A model can be anything from 2 numbers scribbled on the back of a napkin, to 100s of numbers tied together in a spreadsheet, to an entire software program performing millions of calculations.

These models are simplified versions of reality that can help us to think better by using numbers. With calculators and spreadsheets, we can build models to help us decide where to go on holiday, how much money to save, and how many employees to hire.

Nassim Taleb likes to say this, and I'm sure we'd all agree with him. Yet in most of our decisions, we wade into precisely these rivers by making estimates based on averages: we don't account for uncertainty.

Now more than ever, we need to account for uncertainty when making decisions. Unfortunately, there are many wrong ways to do it.