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All right.
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This video we're going to look at measures of central tendency beginning with some terms.
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I'm sure you're already familiar with that is mean median and mode.
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One thing to note here I want to show you the symbols for mean we actually have two different symbols
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depending on if we're talking about the population or a sample.
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So if we're talking about us and by the way throughout these videos I mean introduce terms for us our
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symbols that represent a population on the top.
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I'm going to sort of do these all this old branching thing you'll see on the top a symbol for for population
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which is the Greek symbol mew and below look for for sampling on the line below.
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It's an X with a bar over it.
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So this is population
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and sample mean.
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Let's quickly go through how to calculate each of these which again I'm sure you're familiar with.
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I mean you just take the sum of all the values that you have and divide that sum by the number of values
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you have.
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So it's just some of your values divided by n and representing the number of data points Median is a
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little bit different to calculate your median you line up all your values from smallest to largest and
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the median is the value that is directly in the middle.
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If you have haven't that that works very well if you have an odd number of values but if you have an
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even number of values you take the two values in the middle and you average them and that's your median
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mode is just the value that comes up most often in your data.
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Now one question I get a fair amount is well how do I know which is the better representation of central
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tendency.
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People don't usually say measure of central tendency but the better sort of middle value from my data
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mean or median.
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Nobody really uses modal all that often but you know when is it more appropriate to use mean or median.
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Well up there both they represent slightly different takes on the data.
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So you know if you've got both.
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Sometimes you look at both of them and that kind of helps guide your thinking.
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But there is certainly some situations where one or the other might be more appropriate to you.
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So oftentimes when you're when you're talking about money especially when it comes to things like investments
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mean might be more appropriate for instance if you're looking at the returns of an investing company
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or you know what or whether the average returns for a venture venture capitalist I mean is a good representation
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you know because a venture capitalist they're going to sell some home runs and get a big payback and
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they're going to take a lot of losses and that's OK as long as they're there they're mean return.
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Ends up being high.
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The average return ends up being high median.
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You might use median if say you were trying to price a product to a certain population like let's say
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you're entering a new market and you want to understand sort of what the average person can afford.
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You might not use mean because for instance let's say there's there's a there's there's there's a discrepancy
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in terms of incomes in that that new market.
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You know some people are making a huge amount of money.
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A lot of people are just scraping by.
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If you're trying to sort of market your product to the masses looking at mean might not be so good because
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the average might have been skewed by those those really high earners.
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I'm even that even though they might represent a small part of the population.
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So in that case using the median household income might be a lot more appropriate in terms of thinking
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about what the right price to gain market share would be.
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So that's that those are just some some some quick thoughts on I mean otherwise known as average or
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at or at arithmetic mean versus median all.
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Oh get into the different scene arithmetic and geometric mean in a moment.
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So I want to.
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But before that I want introduce a couple other concepts related to sort of related to the median.
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The first is percentiles.
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This is gonna come up a huge amount in statistic.
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This idea the statistics this idea of percentiles when we say the percentile what we mean is the percentage
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of results in your data that falls below a certain number.
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So for instance if I said this value is at the fifth percentile it means 5 percent of all of your values
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fall below that number if I said if you tell me you scored in the ninety ninth percentile for the S.A.T.
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first of all congratulations that's very good.
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That means ninety nine percent of all the other test takers everyone else who took the S.A.T. that year
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had a score that was below your value.
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So again a percentile is the value at which whatever percent falls below that number eighth percentile
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means 68 percent of the results are below that value.
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Another concept I want to introduce is quartile is very very much related
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trials are typically represented by the 25th percentile the fiftieth percentile and the seventy fifth
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percentile.
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This quarter's your data so everything below you is basically saying everything below the twenty fifth
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percentile.
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That's one quartile.
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Everything between the 25th percentile and the fiftieth percentile.
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That represents a quarter of your data.
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Everything between the fiftieth and 70 percentile.
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That's a quarter of your data and everything at the seventy fifth percentile and above that represents
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a quarter a quarter of your data.
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It's often represented in in one when people report but report their core tiles as everything between
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the 70 the 25th and the seventy fifth percentile.
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So again going back to the idea of S.A.T. scores oftentimes colleges will report their S.A.T. scores
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in court files so they'll say that's the twenty fifth to seventy fifth percentile is say for S.A.T.
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scores would be between twelve hundred and fourteen hundred.
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I don't even remember if we're still on a sixteen hundred score scale.
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I know that's changed back and forth but yeah that would be our entire quartile range would be between
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the 25th and the seventy fifth percentile.
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So you say you know art are twenty four.
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Twelve hundred is at the twenty fifth percentile meaning twenty five percent of our results were below
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twelve hundred fourteen hundred is the seventy fifth percentile meaning seventy five percent of the
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results are below fourteen hundred in our entire quartile range would be between twelve hundred and
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fourteen hundred.
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Right the last measure of central tendency that I want to introduce is something called the geometric
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mean
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and I want to distinguish this from the arithmetic mean which is what we were talking about earlier.
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I sort of teased this earlier.
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So the arithmetic mean is what we generally think about when we're talking about an average.
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That's where you take the sum of all your your your your values and you divide by the number of values
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you have.
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That's the earth medic mean the geometric mean is a little bit different.
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We calculate it by taking the product
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of our values
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and we take that to the one over in power.
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Now the geometric mean so you can see it's a different calculation.
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The geometric mean is used to calculate growth rates over time and is often called the time weighted
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rate of return.
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It's not a huge part of statistics and it's not a big part of this course.
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However I wanted to introduce it here because it is it's great for finance.
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The arithmetic mean does not take into account compounding.
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So in situations where there is compounding where you have growth rates over time you will want to use
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the geometric mean it's a more accurate reflection of average the average changes.
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So for instance if you've got an investment that is growing over time this compounding associated or
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shrinking over time I should say.
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But there's this compounding associated with the changes over time.
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The geometric mean is a really good measure.
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Likewise if you have a population that is changing over time and here I'm using the term population
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to mean like people living in an area or a wildlife population again in these situations a geometric
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mean will be useful.
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So let me illustrate with an example.
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Oh and one thing I should note here because it's taking into account compounding the geometric mean
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is always going to be lower than the arithmetic mean just little factoid.
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So let's say I let's say you running a sales department and you've been given a mandate from your supervisor
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to double sales within five years and you want to know how much does your sales have to grow each of
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those five years so that you will hit your target of doubling growth within five years.
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Some of you may be thinking right now well OK doubling growth that's one hundred but I have to increase
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growth by increased sales by 100 percent and I've got five years to do it.
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So I'll just take one hundred percent divided by five and that is the number I need to hit every year
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in terms of growth to get to that one hundred percent increase.
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And you would be wrong.
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The reason is again because of compounding and in fact you don't need to get all the way to 20 percent
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growth in order to hit your target of one hundred percent increase in your sales.
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That's because let's say you start off at one hundred thousand dollars in sales.
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I'm just making up numbers here.
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If you increase your sales by 20 percent in year one now you're at one hundred twenty thousand dollars.
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And then if you take 20 percent of that it's a larger than 20 thousand dollars increase the next year
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and you're just going to keep growing and you'll actually end up well ahead of your target of doubling
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sales and of course you're not that person you you only want to do the minimum.
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So let's let's actually figure out using the geometric mean what your target growth needs to be year
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over year.
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So thinking about this year the year end numbers here your is your your increase year over year.
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Let's just.
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We don't need to to solve for what that number is going to be we just need to realize that we need to
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hit to the product of our year over year growth over those five years needs to be two because you're
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looking to double your your sales.
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So what we've got here is it's red to actually perform my calculation the product of our end numbers
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meaning our growth year over year is 2.
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And we've got five years to do it.
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So up here I'm going to take one over five and that equals I think something like one point one for
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nine that's rounded on meaning we need to be at about 15 percent growth per year
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one point one for nine is it would be like one hundred and fifteen percent.
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And of course you know that would be an increase so you really need to be just growing by 15 percent
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per year.
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So remember I guess a geometric mean not a huge part of statistics we're not gonna be using it a whole
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lot but it is something you're going to want to keep in mind when you get to subjects like finance.
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Remember it is for growth rates over time good for things like investments.
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And it takes into account compounding.
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