Regression Toward The Mean Flashcards, test questions and answers

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What is Regression Toward The Mean?

Regression toward the mean is a phenomenon observed in statistics whereby extreme values of a variable tend to be less extreme on subsequent measurements. It is an important concept in the evaluation of scientific experiments and can also have implications for other aspects of life, such as gambling and financial decision-making.In scientific experimentation, regression toward the mean indicates that results deemed to be extraordinary are likely to return closer to average levels when retested or replicated. For example, if a scientist were to measure the height of every person in a room and found one person who was extremely tall compared with all others, then if they measured all those people’s heights again at another time, it is likely that their height would be closer to average than during their first measurement. This phenomenon occurs because any extraordinary measurement has some degree of randomness or luck associated with it; therefore, when retested at another time without those lucky factors present, it will regress back towards its true mean value.Outside of scientific experimentation, regression towards the mean can affect financial decision-making by making investors overly optimistic regarding stocks (or other investments) that have recently performed well. Due to the tendency for these investments’ performance levels eventually regress back towards their true means, investors may overestimate potential returns over long-term investment periods and thus make decisions based on faulty expectations. Similarly in gambling situations where lucky streaks occur such as someone winning 5 times in a row playing roulette there will inevitably be some kind of regression towards the mean; meaning that although their luck may continue temporarily, it is unlikely that they will continue winning indefinitely since luck ultimately evens out over time. Overall, regression toward the mean is an important concept both within scientific experiments and outside them particularly related to financial decision-making and gambling activities where investors’ expectations need to remain grounded despite short term successes or failures.