The Flaw of Averages: Why We Underestimate Risk in the Face of Uncertainty

CHAPTER 3

Mitigating the Flaw of Averages

This chapter will provide an overview of some useful technologies in the struggle against the Flaw of Averages. They have evolved significantly since I first began to focus on this problem in the early 1990s, and like most advances they are intertwined with one another and with evolving management practices. I will begin with a comparison to previous advances in information technology and then provide more details using an analogy with the adoption of the lightbulb.

Probability Management

The Microcomputer Revolution can be said to have started in earnest with the word processor in 1976. The tedious tasks of typing, correcting, and editing letters and manuscripts were transformed nearly overnight by the ability to compose electronically before committing ink to paper. Then in 1979, VisiCalc, the first electronic spreadsheet, brought a similar transformation to accounting and business modeling.

By the late 1980s organizations had data management systems in which large central databases could pass numbers back and forth with individual spreadsheets on desktops. Although these systems have many benefits, they are also capable of disseminating the Flaw of Averages on an enterprisewide scale.

Probability Management may be viewed as a data management system in which the entities being managed are not numbers, but uncertainties, that is, probability distributions. The central database is a Scenario Library containing thousands of potential ...