Maximum Versus The Mean

By Andy Macken | More Articles by Andy Macken

Given the recent budget announcements in Australia and the fact that it’s Friday, I thought I would deviate slightly from the specifics of equity investing for this blog post.

I recently returned from living in the United States for five years. When discussing topics such as healthcare or education with my American friends, the point was often made to me that America had the best universities, doctors and hospitals in the world. Ipso facto, America must have the best education and healthcare systems in the world. Right?

Recently, our own Treasurer told our Parliament that: “Australia should have at least one university in the top 20 in the world…” This ambition to compete with the best in the world is a primary motivation to deregulate Australian university fees.

Leaving politics aside, I wonder if there is some implicit confusion between the concepts of maximum and mean (or average)? And what should we even be solving for?

Consider the following thought experiment: there are two countries, A and B. Both have a range of quality in their institutions (such as universities or hospitals). Country A has a much wider range, however, with some outstanding institutions and some very poor institutions. Despite the wide range in quality, Country A can indeed claim the “best universities and hospitals in the world” and is the envy of all other countries.

By contrast, Country B has a much narrower range of quality across its institutions; but with an average quality level much higher than that of Country A. Unfortunately, however, Country B cannot make the claim it has the “best” institutions in the world.

chart

So the question is: in which country would you rather live? (And bear in mind, the best institutions in Country A are accessible to those citizens of Country B – at a price).

Should we be trying to increase the maximum (i.e. the quality level of our best institution); or the mean (i.e. the average quality of all our institutions)?

Andy Macken

About Andy Macken

Andrew Macken is a Portfolio Manager at Montgomery Global Investment Management. Andrew joined Montgomery in March 2014 after spending four years as a Research Analyst under Jim Chanos at Kynikos Associates in New York.

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