Savings in a Black Box

Abstract

Would you send your youngest child to the shore of a lake armed only with the average depth? When it comes to economic and financial risks, the answer differs from the one a good father or mother would give. What usually happens is that, for want of anything more complete, averages capture most of the attention. But the volatility around those averages (assuming anyone has even produced it as a figure) gets lost in some footnote or passing remark. Thus, when headlines are written, no one seems much troubled by quantitative considerations and, for example, we routinely read the performance figures of mutual funds and the returns on pension fund shares without noticing the absence of numbers on the deviations—actual or expected—around those averages. Continue reading...