IDEA #57
Great performance, but I regress
Extreme performance is rarely permanent.
What you need to know
Why do some football players have one tremendous season only to follow it with a mediocre one? By the same token, why is it that one fund manager can average exceptional returns one year, only to have a disastrous one the next? The answer – a lot of the time at least – can be found in a statistical quirk known as ‘regression to the mean’ (RTTM).
Why it matters
Sir Francis Galton popularised the term in the 1880s through a paper on the subject (incidentally, the paper incorrectly theorised why RTTM occurs, but his observations were ...
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