Introduction
Has it ever occurred that you are just going around with your life & all of a sudden in you surroundings like your workplace or on financial news on TV, you hear the words "Standard Deviation" & get confused? And then when the numbers start popping up & people start discussing about it, do you become anxious? Well fear not because we are here to get you done with the basics.
Example
Let us have a look at the following example first.
Imagine there are two batsmen with following scores in the past 6 cricket matches:
Batsman A – 0, 100, 150, 10, 15, 25
Batsman B – 45, 65, 80, 40, 40, 30
Now suppose you are to play a tournament final & can add either of the two batsmen to your squad, who will you choose?
If you only look at the average, then you will realise that both the batsmen have the same average of 50 runs per match 🤨.
However, you will notice that Batsman A is very inconsistent. He has played poorly in 4 out of 6 matches but has outperformed in the balance two. On the contrary, there is B who consistently moves the team score in every match.
Hence, you might want to play B in your squad to get a higher chance of getting at least some decent performance.
Now, the above analysis we just performed is what is called 'Standard deviation'.
So, what is standard deviation?
The standard deviation is a number which summarizes the variability in a dataset.
It represents the typical distance between each data point and the mean.
Smaller values indicate that the data points cluster closer to the mean & the values in the dataset are relatively consistent (like we saw in the example with batsman B)
Higher values signify that the values spread out further from the mean. Data values become more dissimilar, and extreme values become more likely (like we saw in the example with batsman A).
Where is standard deviation used?
Standard deviation is widely used across industries for various purposes including:
Mathematics & Science & R&D : It helps understand the distribution of values in a dataset. How dispersed are they from the mean (Just like what we saw in the example above).
The standard deviation is also employed in scientific research, such as in analysing experimental results or studying natural phenomena with varying data points.
Finance & Investment : It is also used in finance to assess portfolio risk & helps evaluate investment options. It is also used to assess the risk or chance of not getting desired returns based on past performances of business, policies, stocks.
Manufacturing : Indicates the variability in manufacturing processes (Six Sigma framework).
Way forward
Did the above small overview helped you? Do you want to understand in more detail?
In case the answer to above questions is yes, then I would like you to visit the following links where the experts take a deep dive into various aspects of the standard deviation in easy to comprehend manner.
I hope it was a good read. Hope to see you soon!!!
Do read my other posts & if this was a value addition for you, then please don't forget to share with your friends or colleagues.
Thanks!
Comments