Business, Legal & Accounting Glossary
The Arithmetic Mean, often referred to as the average, is used to derive the central tendency of a sample space. The term Arithmetic Mean is preferred because it helps distinguish it from other means such as the geometric and harmonic mean.
The arithmetic mean of a set of two or more values is the sum of all the values divided by the number of values. In mathematics and statistics the arithmetic mean is one type of average, or measure of central tendency, but schoolchildren are taught to call the arithmetic mean “the average.” Because the arithmetic mean is a fundamental measure, it has application in numerous business contexts. Accordingly, the average usually means the arithmetic mean, and an arithmetic mean is generally called an average. For instance, in real estate, one key measure of the state of the market is the average number of days on the market for properties for sale. Although this measure would be technically described as the “arithmetic mean of number of days on the market,” average days on the market is both simpler to say and widely understood. The term arithmetic mean is infrequently used in place of average, except where technical precision is required.
While the arithmetic mean is often used to report central tendencies, it is not a robust statistic, meaning that it is greatly influenced by outliers. Notably, for skewed distributions, the arithmetic mean may not accord with one’s notion of “middle”, and robust statistics such as the median may be a better description of central tendency.
In the context of stock trading, the arithmetic mean is used in generation of performance statistics. Within the realm of technical analysis, indicators such as the Simple Moving Average (SMA) use the arithmetic mean.
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This glossary post was last updated: 23rd March, 2020