Statistics

What is the law of small numbers? How does ignoring it lead to biased decision-making? The law of small numbers is the bias of making generalizations from a small sample size. In truth, the smaller your sample size, the more likely you are to have extreme results. If you’re not aware of this principle, when you have small sample sizes, you may be misled by outliers. We’ll cover two examples of the law of small numbers in action and how to use your awareness of it to make better decisions.

What is Amos Tversky and Daniel Kahneman’s prospect theory? How does it explain human behavior? Prospect theory is a theory in economics developed by Amos Tversky and Daniel Kahneman. It says that Utility depends on changes from one’s reference point rather than absolute outcomes. The theory suggests that people don’t always behave rationally. We’ll cover what Kahneman’s prospect theory is, how it works, and how it challenges traditional utility theory.

What does “regression toward the mean” mean in psychology? How does it apply to everyday life? Regression toward the mean refers to the principle that, over repeated sampling periods, outliers tend to revert to the mean. High performers show disappointing results when they fail to continue delivering; strugglers show sudden improvement. We’ll cover what it means to regress toward the mean in psychology, 7 examples of regression toward the mean, and how to counter biases related to this phenomenon.