ProbabilityManagement.Org

Book

Dr. Sam Savage's new book The Flaw of Averages

The Flaw of Averages, a seminal new work by Dr. Sam Savage, has just been published by John Wiley and Sons.
Examples from the book and other related materials can be found at flawofaverages.com.

• Highlights from the book

Where to buy:

• amazon.com

Press Release

Palo Alto, California, November 3, 2008

ProbabilityManagement.org announces the DIST 1.0 Distribution String standard

The recent turbulence in financial markets is a sobering reminder that risk and uncertainty are always in the shadows. Yet today’s risk management is usually based on archaic and outdated nineteenth century statistical concepts such covariance. This approach cannot capture the nonlinearities and optionality of the modern economy, nor does it allow for risks to be easily consolidated across an enterprise.

Now a group of academics, software developers and managers have come up with a new computer data type, the Distribution String, or DIST, for short, to correct some of the glaring problems with classical risk management.

History

The concept of Probability Management (see www.ProbabilityManagement.org) is based on the work of Dr. Sam Savage of Stanford University, Stefan Scholtes of Cambridge University, and Daniel of Zweidler of Merck & Co., Inc. In 2005 it was first applied on an industrial scale to consolidate the portfolio of petroleum prospects at Shell International Exploration and Production, when Zweidler was at Shell. In 2006 the approach was greatly enhanced through the introduction of the Risk Solver from Frontline Systems, headed up by Dan Fylstra, a co-founder of VisiCorp, which marketed the first spreadsheet, VisiCalc. The basic approach prescribed by Probability Management is now also supported by JMP from SAS Institute, Crystal Ball of Oracle Corp, and the Vanguard System from Vanguard Software Corp.

Distribution Strings

Although the Risk Solver technology greatly improved portfolio modeling at Shell in 2007, the approach still used vast quantities of data to model tens of millions of possible uncertain outcomes. Then in 2008, Savage devised a new data type: the Distribution String, which packs together a thousand or so numeric outcomes into a single character string. This allows a probability distribution to be represented as a single data element in a spreadsheet or database, and furthermore greatly speeds up computation.

Open Standard

Savage believed the best way for this idea to flourish was to publish it as open source, and in 2008, he formed an ad hoc committee to establish a useful format standard. Members of the committee include Nobel Laureate Harry Markowitz at the University of California in San Diego; John Sall, the co-founder of SAS; Dan Fylstra of Frontline Systems; Daniel Zweidler of Merck and Co. Inc.; Bryan Baker of Shell International Exploration and Production; Eric Wainwright of Oracle Corp.; Rob Suggs, CEO of Vanguard Software Corporation; David Cawlfield of Olin; Robert Ameo of Market Modelers; Doug Hubbard of Hubbard Research; and Darren Johnson of Genentech, among others.

The resulting standard benefited greatly from this collaboration, and is now available at www.ProbabilityManagement.org. For more information on the DIST standard, email us.

To learn more about Probability Management and upcoming events, email us.