Standard Deviation

The standard deviation measures the average distance from the mean. In fact, there is no need to learn how to calculate this (the process involves multiple steps) since Excel or other software can do this for you easily.

To understand the standard deviation, let’s take an example of the home values in your neighborhood. Suppose that the average is $145,000 and the standard deviation is $24,000. This means that one standard deviation below the average would be $133,000 ($145,000 – $12,000) and one standard deviation above the mean would come to $157,000 ($145,000 + $12,000). This gives us a way to quantify the variation in the data. That is, there is a spread of $24,000 from the average.

Next, let’s take a look at the data if, well, Mark Zuckerberg moves into your neighborhood and, as a result, the average jumps to $850,000 and the standard deviation is $175,000. But do these statistical metrics reflect the valuations? Not really. Zuckerberg’s purchase is an outlier. In this situation, the best approach may be instead to exclude his home.