The Second Moment

This brief article discusses the statistical “second moment” that measures the variability in a distribution. Over the years, society’s focus has expanded from looking only at first moments to considering second moments. A consideration of second moments of the distributions of an array of economic variables can aid in understanding societal concerns about outcomes and risk tolerance following the recent global financial crisis. Such an understanding provides a basis for interpreting the use of various mechanisms, including prudent asset allocation, options, regulation of the freedom to make contracts, state participation in markets, and taxation. This brief article discusses the statistical “second moment” that measures the variability in a distribution. Over the years, society’s focus has expanded from looking only at first moments to considering second moments. So, we look, for example, not only at the average wage but also at the distribution of wages; we look not only at the expansion of GDP but also at the differences in the way it affects individuals. Considering the second moment is a big advance in the way society evaluates both outcomes and risk tolerance. A consideration of second moments of the distributions of an array of economic variables can aid in understanding societal concerns about outcomes and risk tolerance following the recent global financial crisis. Such an understanding provides a basis for interpreting the use of various mechanisms, including prudent asset allocation, options, regulation of the freedom to make contracts, state participation in markets, and taxation.Note: The author’s views expressed in this article are entirely his own and may not reflect the views held by Russell Investments.