Question

What are some practical examples of the use of standard deviation in data use for business?

Answer 1

Standard deviation is a measure of how spread out a data set is. It's used in a huge number of applications. In finance, standard deviations of price data are frequently used as a measure of volatility.

In opinion polling, standard deviations are a key part of calculating margins of error.

Standard deviation is a measure of how far away individual measurements tend to be from the mean value of a data set.

First, let's look at what a standard deviation is measuring.

Consider two small businesses with four employees each. In one business, two employees make $19 an hour and the other two make $21. In the second business, two employees make $15 an hour, one makes $24, and the last makes $26:

In both companies, the average wage is $20 an hour, but the distribution of hourly wages is clearly different. In company A, all four employees' wages are tightly bunched around that average, while at company B, there's a big spread between the two employees making $15 and the other two employees.

Standard deviation is a measure of how far away individual measurements tend to be from the mean value of a data set. The standard deviation of company A's employees is 1, while the standard deviation of company B's wages is about 5. In general, the larger the standard deviation of a data set, the more spread out the individual points are in that set.