Have you ever played the carnival game where you have to guess the number of jelly beans in a jar? If you have, I’m pretty sure you got the number wrong. I am also sure that you were off by a large amount. I am also sure that the average of all the guesses made by the participants was dead close the the actual answer.
That is the magic of averages. You are always wrong!
But do not worry because everybody is wrong as well. The only reason an answer for the game can actually be correct is either you are lucky, or a large number of people guess different answers causing their average to be close to the answer.
Averages are the deadliest things in economics. We use averages to decide important things like government policies, rationing, etc., but more than often, we go astray when we follow averages.
The reason is that the average represents a number which is the middle number of a cumulation of all the possible answers or values. The problem arises when there is an outlier or a number which is and extremity. Lets consider this example:
Marks in accounts for 5 children in a class are- 44, 48, 47, 46, 99.
The average accounts marks of the class is 57. This makes sense but the problems arise when you are to assess how good the class is in accounts. If you are given the average without any more information, you would assume that the class is fairly decent with a 57. However, this is incorrect. Just because one person got 99/100, the whole average is skewed in its favour raising it to 57. This causes a massive standard deviation causing incorrect analysis of how good the accounts class is.
This problem is pertinent in macroeconomics as well. While calculating the average per hectare wage, if a few areas in the country have a massive outlier value as compared to the other areas, grave errors can be made during assessment.
So don’t believe in averages. Averages may seem nice for some people like a struggling batsman who has a poor strike rate the whole season. If in the last few matches, his rate explodes, the whole average changes in his favour.
But this is just one case. Averages seem to be an easy way out in solving problems. One does not need to individually scan through all the data and can just make a judgement from the averages. But that is the easy way out, and as I always write- an easy way-out will never lead you anywhere. Look out for outliers, they will lose you lots of money on betting.
