Winsorized Mean
Candlefocus EditorThe winsorized mean is calculated by first sorting the data in ascending order. This is done to identify which values are outliers. The values that are found to be the smallest and largest are then replaced with the next largest and smallest, respectively. This helps to reduce the impact of the outliers on the average. The remaining values are then added together and divided by the number of observations (or data points) to obtain the winsorized mean.
The winsorized mean provides a more accurate measure of the average of a data set than the basic mean, as it excludes both the influence of the outliers and any skewed data. As such, it is often favored in situations where extreme values may be found, such as when dealing with samples of different sizes. It can also be used in finance to provide accurate returns on investments, addressing the issue of extreme fluctuations that can be experienced in the markets.
The winsorized mean should not be confused with the trimmed mean, another form of robust statistics. While the winsorized mean involves replacing the outliers with more moderate values, the trimmed mean involves removing the outliers instead. The results of the two usually tend to be similar despite their different approaches, but the winsorized mean is nonetheless the preferred option when data sets with extreme values are being considered.