Flaw of averages--why forecasts are always wrong

Forecasts made with averages, will on average, be wrong...

Great articles on using computer simulations (monte carlo simulation) to create a more accurate picture on predicted profits etc.

You can download the excel spreadsheet and demo software too.

Dr Sam Savage is an expert in making decisions under uncertainty.

He has what he calls The Flaw of Averages.
He runs thru a theoretical situation where you open an online movie database but have to allocate server bandwith beforehand (ie predict demand).

You will see why you always over-exaggerate profits and dramatically increase the risk of going broke by using averages in your forecast.

You can download an excel spreadsheet with his monte carlo software on it and run it to see how it works for yourself. Basically, the computer runs thru all the different options and plays them thousands of times, adding up which way loses you the most money and which way makes you the most.

http://www.optimizemag.com/issue/002/financial.htm

And another way of looking at it for retirement:
http://simulationtutorials.com/flawarticle.htm

And one more:
http://www.businessweek.com/2001/01_04/b3716156.htm

Game theory put to use in business analysis!

Tom B.
Always looking for the edge