|Overview: Regression Toward The Mean|
The tendency for extreme results to get closer to average with time.
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.
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