Statistics is one of those things that I thought I’d like, but when it came to practice I actually didn’t.
Maybe it was my teacher, maybe it was because it was summer school, maybe it was just me… but I hated the class.
But one concept, that I see often is the concept of regression to mean.
As a reminder, mean is the middle value of all possible outcomes.
Looking at all possible outcomes, the most common outcomes are closest to the mean and outcomes become less common as you move away from the mean.
To get the mean, you add up all possible outcomes and divide it by the total number of outcomes to get the mean.
So when talking regression to mean, it’s the concept that if one outcome, or sample of outcomes, is extreme, the next outcome (or sample of outcomes) is likely to be closer to the mean.
While this is used in scientific settings, it still applies personally as well.
What tends to happen is we have a great outcome and assume that outcome will be what happens going forward.
We see this in society with the “jinx.” Someone gets praised for a great outcome, but then immediately fails. It’s seen as the person doing the praising jinxing them, but in reality, they were primed to revert to their mean (or average) performance.
I’ve seen this often in basketball. A player makes a string of free throws or shots and the announcer mentions it right before their next one.
They miss and the colleague exclaims “you jinxed them!”
A quick youtube search got me this compilation of Announcer “jinxes” with 2.5 million views.
So, why does this matter to you?
We often perform our best and assume that that performance will keep on.
When it doesn’t, we beat ourselves up and self-sabotage future results.
So, how do we stop that?
- We acknowledge the extreme outcome
- We think of ways to overcome the regression
- When we do revert to mean, we let it go
1 & 3 don’t need much explanation, but let’s talk about 2. How can we overcome it?
Let’s use losing weight as an example.
When first trying to lose weight, often the weight comes off easy.
But somewhere down the line it quits being easy and there will be a setback.
Often, this setback results in a loss of faith and falling back in old habits that got you to a higher weight.
So, there are 2 ways to combat that:
- When the weight comes off easy, remind yourself that it won’t always be this way and double down
- When you see the setback, use it as a catapult to motivate you to dig in
Each of these responses requires resilience and discipline to fight against our natural urges.
The inner game mentioned above is huge, but you can also create systems to stop you from the big fall.
In the weight loss example, this may be accountability in the form of person or negative consequence if you don’t stick it through.
These stopping points allow you to reach higher heights because you don’t have the low points holding you back.
So how does this apply to your money?
When you have a good month, remind yourself of the mean.
Then ask: how can I raise my floor?
By raising the floor, or lowest revenue, you give the mean an opportunity to tick up.
You do this by:
- Creating systems that feed your pipeline
- Refocus and reset your goals
- Focus on repeat customers
- Hiring the right people
While sales drive a business forward, systems help a business stay consistent.
Put in the right systems, and your business will thrive. Fail to and the low points will keep your mean from increasing.
Over time this can be demoralizing and lead to even worse results.
This is why I’m a big proponent of understanding Financial Statements and the RIGHT KPIs.
When you do, it helps you to identify these trends earlier and make better strategic decisions.
If you want to better understand financial statements, here are 3 ways I can help: