If you’ve read my previous post you know I got married very recently. When I asked my new wife the other day to name her favorite celebrity, she said Ryan Gosling; unfortunately I look nothing like him – so I’m not quite sure where that leaves me. As a form of revenge I’ve decided to use Mr. Gosling to demonstrate some key insights in the commonly misunderstood topic of Weighted Average. Ryan will never forgive me!
For the purpose of this blog post let’s assume that Ryan Gosling made $10M per movie in 80% of his movies and $20M per movie in 20% of his movies. His average paycheck would have been $15M if his salary were distributed evenly between $10M and $20M – but an 80-20 distribution means we’ll have to put a little more thought into the situation. If we want to know how much Mr. Gosling made on average per movie, we have no choice but to calculate the weighted average.
Some math lovers might use an algebraic formula to calculate the weighted average, but I believe using a visual approach for this calculation will drive a deeper level of understanding for us regular folks.
Use your intuition and try a visual approach
If I asked you for a range of the weighted average of Ryan Gosling’s paychecks, your intuition would probably suggest between $10M and $20M. You might even propose that the weighted average be closer to $10M than to $20M (since $10M has a heavier weight – 80% vs. 20%). You would be absolutely correct!