Regression To Mean

Have you ever noticed that things tend to even out the next time after an exceptionally good or bad day?

Why do we tend to think that a lucky streak will continue or that a losing streak is doomed to last forever?

Have you ever experienced a drastic improvement in your performance on a task, only for it to drop back down shortly after, its the regression to the mean effect

Learn about cognitive bias regression to mean, who typically falls victim to it, and how you can protect yourself from its effects.

Understanding The Regression To Mean

Regression To The Mean” is a way of thinking that happens when something not as good or not as bad happens after something really great or really bad. It means that when something extreme happens, it is not always possible to keep having such extreme results. So, things go back to being more normal or average.

Sir Francis Galton first observed the regression to the mean in the late 1800s; he experimented with the relationship between parents’ heights and their children.

Galton found that children’s heights tend to gravitate towards the average height rather than directly mirroring their parents’ heights. Why does this happen?

A child’s height is influenced by various factors beyond just their parents’ genetics. Environmental conditions and other unknown elements play a role in shaping a child’s stature.

While a certain level of correlation exists between a child’s height and their parents’ height, it is not a perfect match. Regression to the mean is, therefore, an inevitable occurrence. Many variables come into play in real-life scenarios, making it difficult to identify this phenomenon.

This phenomenon can be seen in everything from sports performance and stock market returns to weather patterns and scientific experiments. This tendency keeps us chasing unlikely outcomes and fantasizing about unlikely successes, “regression to the mean” shows us how fickle human cognition can be!

The Exploited and The Exploiters

“Regression to the mean” often affects those who have unrealistic expectations of success or outcomes. These individuals may make irrational decisions and take unnecessary risks to pursue a level of success that is not grounded in reality.

As a result, they may experience disappointment when they do not achieve their exaggerated goals and may suffer from the consequences of their excessive risk-taking.

In contrast, individuals who are aware of the reality-based principles of “regression to the mean” are better equipped to manage uncertainty and make informed decisions. Investors, athletes, scientists, and other professionals can use their understanding of this concept to improve their chances of achieving desired results without relying solely on overly optimistic assumptions.

By taking a more realistic approach and recognizing the effects of regression on the mean, they can improve their chances of success while reducing unnecessary risks.

Day-to-Day Regression To Mean

When an athlete sets a personal best in their performance at an event, only to have their times or scores go back to their normal range in competitions afterward.
When a company reports record profits for one quarter, it returns to its usual growth rate afterward.
When someone wins big at the casino, they only find out their luck isn’t so great on subsequent visits.
When an investor makes huge gains with a stock but finds it difficult to repeat similar success despite taking all the same precautions and research as before.

Recognizing When You Are Slipping Into The Regression To Mean Trap

The best way to identify when one is falling into the trap of regression to the mean (in cognitive biases) is to keep track of long-term trends, not just brief moments of success.

It’s important to step back and ask whether the success was due to luck, genuine skill, or knowledge. Suppose the individual or organization in question has seen similar successes in the past. In that case, it is safe to assume that these results are well within normal parameters. On the other hand, if this is a one-off event, then caution should be taken before attributing too much significance or value to it.

Overcoming The Regression To Mean

Avoid relying heavily on trends – understand that they are fleeting and often false signals.
Save some money to have a cushion if your investments do not pan out as expected.
Develop an understanding of basic probability and statistics to predict the likelihood of success more accurately
Stay informed – keep up with news and other current events to help contextualize how decisions will affect outcomes.
Evaluate objectively – resist the urge to jump on every bandwagon and ensure your decisions are rooted in reality.
Practice rational skepticism – question assumptions, test hypotheses, and carefully weigh risks vs. rewards before taking action
Monitor performance – track progress over time and adjust approach as needed for optimal results

Final Thoughts

We all love watching our favorite cricketers shine on the field, but did you know that a dip often follows their exceptional performances? Let’s say your favorite cricketer’s performance has been outstanding game. It’s likely that the next one won’t be as exceptional. On the flip side, if they have a poor performance, their next one is likely to be better. Why? Because their performance naturally tends to move back toward the average or mean value.

But why does this happen? Well, it’s not just about skill. Factors like the skill of opponents, weather conditions, and even luck play a role in influencing a sportsman’s performance. These unpredictable factors can cause fluctuations in their game.

Therefore, if a batsman scores 150 runs in one match, we can expect his next few innings to be closer to his average score of 50 runs per match. However, if he scores a duck in his next two matches, it doesn’t necessarily mean that he has suddenly become a worse player.

It’s important to remember that even the best cricketers experience these fluctuations. So, don’t overreact to a single outstanding or poor performance. Recognize that regression to the mean is at play, and enjoy the ups and downs of the game.

Finally

With a tendency to keep us chasing unlikely outcomes and fantasizing about unlikely successes, “Regression to the mean” shows us just how fickle human cognition can be! We hope that this blog post was helpful, be sure to subscribe to our newsletter for more.

Reference

The above article is based on the book Thinking Clearly; this article is here to help us learn and understand how our minds can be tricked by something called cognitive biases.