personnel profile

Embedding analytical techniques in spreadsheets, data bases and the OLAP environment, Risk Minimization in Petroleum Exploration, Stochastic Modeling in Accounting and the Law.

Dr. Savage's primary focus is on removing what he refers to as the 'Algebraic Curtain' separating Management from Management Science. This activity lies in the domain of Informational Design. His experience in consulting and expert testimony have led him to address the disparity between the way risk and uncertainty are treated in industry, and how the subjects are taught in the typical statistics course. Two recent publications in this area include “The Flaw of Averages” in the Harvard Business Review, and “Accounting for Uncertainty” in the Journal of Portfolio Management. Current areas of interest include: Stochastic modeling in Accounting and the Law Stochastic Information Systems to effectively communicate risk and uncertainty between various parts of an organization. Risk minimization in petroleum exploration, by extending portfolio optimization techniques from finance. Although Savage received his Ph.D. in the area of Combinatorial Optimization, he has also done work in Combinatorial Obfuscation, developing the SHMUZZLE(tm) Puzzle , a tessellation based jigsaw puzzle inspired by M.C. Escher.

Definition of the Flaw of Averages

The Flaw of Averages is the term I use to describe the fallacies that arise when single numbers (usually averages) are used to represent uncertain outcomes. And surprisingly even most graduates of statistics courses have trouble with the basic concepts of dealing with uncertainty. Worse yet, Generally Accepted Accounting Principles (GAAP) is strewn with these fallacies in many areas. This, however, has not prevented new laws requiring CEOs to certify their inevitably flawed financial statements (see Accounting for Uncertainty, Sam Savage and Marc van Allen, Journal of Portfolio Management, Fall 2002). Although the Flaw of Averages takes on many forms, they fall into two primary categories of misunderstanding: portfolio effects and nonlinearities. Portfolio Effects This form of the flaw of averages results from ignoring the effects of diversification and statistical dependence. This is the problem addressed by Modern portfolio theory, whose foundation was laid by Harry Markowitz and Bill Sharpe. However, its implications are largely ignored beyond Wall Street. For example, in capital budgeting, projects are often ranked from “best” to “worst”, whereupon funds are allocated from the top of the list down until the budget is exhausted. Although some firms refer to this as portfolio management, it ignores the true portfolio effects (see Holistic vs. Hole-istic Exploration and Production Strategies, Ben C. Ball and Sam L. Savage, the Journal of Petroleum Technology. Sept 1999 and its accompanying notes and spreadsheet model. Even the most basic effect of diversification across assets is difficult to understand intuitively. To counter this problem, Rick Medress, president of Cineval LLC, chose to simulate portfolios for his investors instead of describing performance with a single average outcome. Cineval is a media-consulting firm in Los Angeles that provides valuations of film investments. Starting with the historical box office receipts of action films, Medress