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Why do we use standard deviation?

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Quick Answer

Standard deviation is a measure of the variation or diversity of scores in a set of data. It is used to determine how much data varies from the average of a population. The larger the deviation, the more spread out the data set. Standard deviation is represented by the Greek letter sigma.

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Data is considered to have a normal distribution if it follows the standard bell curve when plotted. If data has a normal distribution, about 68 percent of all data falls within one standard deviation from the mean, or average. Additionally, 95 and 99.7 percent fall within two and three standard deviations, respectively.

Standard deviation is also used to measure uncertainty. Polling companies express the standard deviation in terms of percentage points, and use it to determine how closely a sample population represents the whole of that population. This is how 51 percent to 49 percent on a poll can actually signify a tie in a political race.

Standard deviation is also used to measure the volatility of a stock. A lower standard deviation on a growing stock signifies that it is safer, as it varies little from its historical growth. Investors use this when determining the difference in risk among investment choices.

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