The statistical tendency for extreme values to move toward the average over time — often misinterpreted as causation or skill when it is purely statistical.
Deeper Explanation
Kahneman identified regression to the mean as one of the most misunderstood phenomena in business and investing. After a company delivers exceptional results (far above average), the next period is more likely to be closer to average — not because of any particular action, but because extreme outcomes partially reflect luck. Investors who buy after spectacular quarters often experience disappointment; those who avoid after catastrophic quarters often find recovery. The investment implication: for cyclical businesses, buy near trough earnings (which will revert up) and be cautious near peak earnings (which will revert down). Do not confuse mean reversion with deterioration or recovery.
Continue Learning
Go deeper into the Behavioural school — frameworks, case studies, and decision systems.