Mar

30

From The Mind of Bill JamesThe Mind of Bill James by Scott Gray, which I've been reading:

All things in baseball tend to return to their previous form. A team whose record improves one year will tend to decline the following year, and vice versa. In 1980, for example, only five of the twenty-six teams moved in the same direction in which they moved in 1979. It also applies to individual players. Bill found a way to express not merely the statistical principle of regression to the mean, but also what he called the 70/50 rule. Seventy percent of teams that decline in one year will improve the next; 70 percent of teams that improve will decline; and in all cases the amount of rise or fall is about 50 percent, so that a team twenty games over .500 one year would be ten games over .500 the next. (The percentages are much different for very big or very small improvements and declines.) “These were not things that I had expected to find,” Bill wrote. “Weaned on the notion of ‘momentum’ since childhood, I had expected a team which won eighty-three games one year and eighty-seven the next to continue to improve, to move on to ninety; instead, they consistently relapsed. Half-expecting to find that the rich grow richer and the poor grow poorer, I found instead that the rich and the poor converged on a common target at an alarming rate of speed.

It also applies to individual players. Bill found a way to express not merely the statistical principle of regression to the mean, but also what he called the 70/50 rule. Seventy percent of teams that decline in one year will improve the next; 70 percent of teams that improve will decline; and in all cases the amount of rise or fall is about 50.

Steve Ellison writes:

From my experience, I think the S&P 500 is less mean reverting in 1- to 2-week timeframes now than it was in the mid-2010s. On the other hand, the presidential election cycle pattern has been spot on since the beginning of bearish midterm election year 2022.

Eric Lindell comments:

These data pertain to relative performance — eg, a team's record relative to other teams. For absolute gauges — like how much I weigh on a diet, there's no such reversion to mean.

Kim Zussman responds:

Funny stuff! For asset managers everything is relative. For their customers (without yachts), it is absolutely absolute.

Where Are the Customers' Yachts?: or A Good Hard Look at Wall Street

Humbert H. agrees:

And that’s why people should not entrust their assets to asset managers, unless these people suffer from some sort of emotional instability and can’t handle losses without some stranger pretending to care.


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