Composition effect
When an average changes because the mix of the group changed, not because the values of the people or things in it changed.
In plain English
If low-paid workers leave, average pay rises even if nobody gets a raise; if juniors join, it falls even if everybody does. The same goes for average test scores, hospital survival rates and customer value. The check is to follow the same members over time, or to compare like with like within each group. Simpson's paradox is the extreme case, where every group moves one way and the total moves the other.
Uncle Gary explains
Kevin's company cut 20 of its lowest-paid jobs and gave everyone else a 2% pay cut. Average pay rose 4.7%, from $55,000 to $57,575, while the median fell 2%.
Why it matters for your money
A fund family's average return improves when it closes its worst funds, and an index changes its members. Check whether a figure follows the same things over time.
Where we tested it
- Why Average Salary Can Rise When Everyone Earns Less
- Does Performance Pay Work? The Windscreen Company That Paid by the Job
Related terms
All glossary terms. Educational content, not financial advice.