Averages

Whenever I read about averages it makes me think about how often people mis interpret numbers due to using the wrong type of average, or only using one average.

Most of the time people use the mean when they are referring to an average. If we are looking at the average net worth of 10 individuals, we add the net worth of each person together and then divide by 10. In some cases, this gives a relevant number but in other cases it does not. As an example, if you have 10 people and are looking at their average net worth and 9 of them are worth $100,000 and the 10th one is worth $10,000,000,000, that average will be seriously distorted due to the one aberration.

One way to address this distortion is to show the median. The median requires you to put the numbers in order, from lowest to highest and then number in the middle is the median. This would eliminate the distortion.

The mode would show you what is the most common net worth as it is the number that shows up most often.

The range shows you the difference between the lowest net worth and the highest.

The best way to understand the numbers is to look at all of these. Having access to the data allows you to look at the mean, median, mode and range and from there, you can truly understand what the numbers mean.

Have a great day!

Lawrence