Why it matters
A single number can answer different questions poorly. Distinguish an average period from the growth of an invested balance.
A worked example
For +10%, −5% and +7%, the arithmetic average is (10 − 5 + 7) ÷ 3 = 4%.
Illustrative example · simplified assumptionsA common mistake
Assuming the arithmetic mean reproduces compounded growth.
Where the idea needs care
This describes the average period, not the compounded growth of your money.
Apply the idea
Explain this concept using a different example from your spending, work, business or a policy debate. State what stays fixed and what could change the result.
See the supporting infographic
The written explanation above is the main lesson. This image offers another way to remember it.
Sources and further study
Examples and explanations by Alibomics. Numeric illustrations are not current market quotations.