The problem with averages is that averages distort reality. For example, the average household has a net worth of approximately $710,000. You and I know that this is impossible based on common sense. But simple math doesn’t lie.From The Average Saving Rate By Income (Wealth Class), by Financial Samurai.
Take the total household wealth in the US of $81.8 trillion (according to the Fed) and divide by 115,226,802 US households (according to the Census Bureau) and you get $710,000.
Saturday, July 25, 2020
Averages distort reality
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2 comments:
If he's looking for that kind of number, he could use the median instead of the mean. I think it's more like "people who don't understand math distort reality."
Good point Jerry. Good zinger, too.
The Samurai's remark reminded me of people who give a number for average GDP growth for a long time period like 1950-2020. Average GDP growth declined over 1950-2020, if you look at shorter periods. Relying on the long-period number is a distortion of reality, as I see it.
I was looking for saving rate by quintile data (to compare to income by quintile) when I found Samurai's article. He says
"The average saving rate by income increases the more you make."
and then
"The problem with averages is that averages distort reality."
and then
"The truth is that savings rates vary by income."
That's what I was looking for.
Then he uses an average in precisely the way he objects to:
"To clarify “savings rate,” a 20% gross income savings rate on $100,000 = $20,000 in the bank for simplicity’s sake. The reality is that you are saving more than 20% if you calculate your after tax income since $100,000 gross is really only around $80,000 net of taxes."
and uses it to reach a conclusion:
"Hence, a 20% gross savings rate is equivalent to a ~25% after-tax savings rate ($20,000/$80,000)."
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