Overview: Regression Toward The Mean | ||
Type | ||
Definition | The tendency for extreme results to get closer to average with time. | |
Related Concepts | Statistical FallaciesCognitive Biases |
What is Regression Toward The Mean? John Spacey, updated on May 10, 2018
Regression toward the mean is the tendency for an unusual set of results to become more average with time as the set grows. It is a commonly observed phenomena that has implications for statistics, science and decision making.Consider the first math test of the semester in a university class. Five students score below 20%, five students score above 95% and the class average for all 100 students is 80%. Regression Toward the Mean would predict that many of the students who scored very low or very high will score closer to average on the second test of the year.
Failing to account for Regression Toward the Mean can result in errors in judgement. For example, a new investor who achieves a 100% return on the first stock they buy may get an extreme boost in confidence that causes excessive risk taking and future losses. If the investor were to recognize that their returns are likely to revert towards average with time, they might take a more conservative approach that protects their capital.
ThinkingThis is the complete list of articles we have written about thinking.If you enjoyed this page, please consider bookmarking Simplicable.
Alpha vs Beta
The difference between two common investment measurements.
Efficient Market HypothesisAn overview of the Efficient Market Hypothesis.
Animal Spirits
An overview of animal spirits, a theory of investing.
Financial MarketsA definition of financial market with examples.Mr Market
A definition of Mr. Market, an investing theory.
Organic Growth
A definition of organic growth with examples.
Concept Company
The common types of concept company.
Information CostsA definition of information costs with examples.Channel Check
The definition of channel check with examples.
Economic TheoriesA list of economic theories that are particularly useful for business.Adverse Selection
The tendency for people at high risk to buy insurance.
Economic Advantage
A list of economic positions or capabilities that allow you to outperform in a particular industry.
Knowledge WorkA definition of knowledge work with examples.ProductionA definition of production with examples.Post Scarcity
An overview of post-scarcity.
Economic InfrastructureThe common types of economic infrastructure.Business Competition
The common types of business competition.
InefficiencyThe common types of inefficiency.Supply Examples
An overview of supply with common examples.
TrendingThe most popular articles on Simplicable in the past day.New ArticlesRecent posts or updates on Simplicable. Site Map
© 2010-2023 Simplicable. All Rights Reserved. Reproduction of materials found on this site, in any form, without explicit permission is prohibited. View credits & copyrights or citation information for this page. |