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Regression to the mean explains random events and outcomes from "summary" of Thinking Fast and Slow by Book Summary
The concept of regression to the mean is a fundamental principle that helps us understand random events and outcomes. When we observe an extreme event or outcome, we tend to expect a more moderate outcome in the future. This is because extreme events are often due to a combination of skill and luck, and when luck plays a significant role, we can expect a regression back to the average. For example, if a student performs exceptionally well on a test, we might attribute this to a combination of their skill and luck. However, if we were to administer the same test again, we would likely see the student's performance regress towards the average, as the role of luck becomes less significant. Similarly, when we observe a particularly poor outcome, such as a sports team losing a game by a large margin, we can expect them to perform better in the future. This is not necessarily because they have improved their skills, but rather because the extreme outcome was influenced by factors outside of their control. Understanding regression to the mean can help us avoid making faulty assumptions based on random events. For instance, if a stock trader has a particularly successful week, we should not automatically assume that they have exceptional skill. Instead, we should recognize that luck likely played a role in their success and that we can expect their performance to regress towards the average in the future. By acknowledging the role of regression to the mean in random events and outcomes, we can make more informed decisions and avoid falling prey to the illusion of skill or luck. This principle reminds us that extreme events are often followed by more moderate outcomes, and that we should exercise caution when interpreting the significance of such events.
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