Editor’s note: This is a reprint of a Big Saturday Interview with Sam Savage conducted in March 2010. We thought you’d enjoy it this evening.
Click here to access this Big Saturday Interview with Sam Savage, author of The Flaw of Averages: Why We Underestimate Risk in the Face of Uncertainty.
Is the road to 21st century risk management paved with the same stones that help us figure out why we are, on average, behind schedule, above budget and below projections?
In his insightful and engaging book, Sam Savage explains why so many attempts to measure and control for risk have failed. With an impressive array of common sense and everyday examples, Savage makes the complicated world of statistics and probability easy to understand for the average – or not so average – retail trader, investor or even businessperson.
Here in the first half of our conversation with Sam Savage, we discuss how the problem of models based on average behavior, and the challenges of using mathematical models when greater and greater degrees of uncertainty are added to the equation. While noting the failings of models, Sam Savage shows how effective modeling is nonetheless important to give us at least a general sense of what our expectations should and should not be.
We are also introduced to three things Sam Savage believes will help solve the “Flaw of Averages” and make it easier for us to grasp otherwise non-intuitive concepts intuitively. These things: interactive simulation, computer visualization and distribution strings (DIST) have all been made possible by relatively recent technological breakthroughs, and could pave the way to a radically new future for probability and risk management for traders, investors and businesspeople alike.
Sam Savage is a Consulting Professor of Management Science and Engineering at the Stanford University School of Engineering. He maintains a website at The Flaw of Averages.com, which includes a number of software tools to help readers visualize many of the concepts in the book, including applying distribution strings in simulations. Try out the software and learn more about Sam Savage’s work at Probability Management.org
Sam Savage is also presenting an upcoming seminar on 21st century risk modeling. The first event is scheduled for New York City on March 19th, with other seminars scheduled for April 8th in San Francisco and April 28th in Chicago. Visit his website at 21st Century Risk for more information.
To read Part 2 of her interview, click here.
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