Why Extremes Don’t Last
In our journey through foundational thinking models for better decision-making, today we examine a quiet but profoundly powerful principle: Regression to the Mean.
It sounds technical, but this mental model has real-world consequences in investing, management, sports, health, and life. It can help you avoid faulty assumptions, see through randomness, and make better long-term decisions—especially when faced with surprising or extreme results.
What Is Regression to the Mean?
Regression to the Mean is the statistical phenomenon where extreme outcomes are likely to be followed by more moderate ones, simply due to chance.
In plain English: Outliers tend to move closer to average over time.
- A student who scores unusually high on a test is likely to do slightly worse on the next one.
- A fund manager who dramatically outperforms the market in one year may underperform the next.
- A sales team with a record-breaking quarter may return to average levels soon after.
This doesn’t mean performance always declines—just that when results deviate from the norm due to luck, they are unlikely to stay that extreme.
Why It Matters in Decision-Making
Humans are pattern-seeking by nature. We instinctively search for causes—especially when we see something extraordinary. But if the extreme outcome was largely due to luck, noise, or randomness, the true cause might simply be… chance.
Understanding regression to the mean allows leaders to:
- Avoid overreaction to extreme performance (positive or negative)
- Distinguish skill from luck in performance reviews and investment decisions
- Design better incentive systems that don’t just reward lucky streaks
- Recognize when interventions actually have no effect
Real-World Applications
1. Management & Employee Performance
A manager might reprimand an employee after a poor performance review, only to see them improve the next time. Or they might lavish praise after a great quarter, only to see a drop. The real reason? Performance regresses toward the mean. Avoid confusing this with the impact of your intervention.
2. Investing and Stock Picking
Many investors chase last year’s top-performing stocks or funds. But data shows that performance often reverts to average. Understanding this principle protects you from being seduced by outliers and keeps you focused on fundamentals and long-term strategies.
3. Sports and Talent Scouting
A rookie scores unusually high in their debut season. Are they a star? Or just experiencing a lucky streak? Scouts who understand regression to the mean avoid overpaying based on exceptional but unsustainable stats.
4. Health and Medical Trials
Patients often seek treatment when symptoms are worst—naturally, they often improve afterward. Without a control group, this can lead to the illusion of effectiveness. Regression to the mean is why we need randomized, controlled studies.
Common Cognitive Mistakes
- The Hot Hand Fallacy: Thinking a streak will continue when it’s more likely to revert.
- Overcorrecting: Making dramatic changes in response to an extreme event (e.g. performance bonus or punishment), thinking the event was entirely controllable.
- Attribution Error: Believing interventions (e.g. coaching, feedback) caused the improvement when natural reversion was likely.
How to Apply It
- Track averages over time. Know what ‘normal’ looks like—individual, team, project, or market.
- Don’t overreact to extremes. Praise and criticism should be tempered when performance deviates wildly from the average.
- Look for patterns, not snapshots. Sustainable trends beat short-term highs or lows.
- Use controls and baselines. Whether in management or analysis, always compare against a reliable benchmark.
In Summary
Regression to the mean reminds us of a humbling truth: Extreme outcomes are often temporary.
By grounding your decisions in long-term trends, focusing on systems over snapshots, and avoiding overreactions to luck-driven events, you’ll become a clearer thinker, a wiser investor, and a more balanced leader.
The next time someone tells you “this time is different,” remember—odds are, the mean is still waiting.
Missed out on the over all series?
Murray Slatter
Strategy, Growth, and Transformation Consultant: Book time to meet with me here!
