Reversion to the Mean

“Reversion to the mean” is chiefly a stock market theory. It postulates that stock index growth has a long-term average; wild deviations from this average eventually revert the other direction in order to maintain the average.

If the historic market average is 10% and one has been riding gains upwards of 20% for several years, the likelihood of upcoming losses will be greatly increased.

Those who constantly seek to outperform the market average via enhanced risk are therefore punished more severely in difficult times. “Pigs get fat and hogs get slaughtered.” Those who play the market too conservatively end up underperforming in prosperous times. “Without risk there is no reward.”

Those willing to ride the average while incurring the most minimal brokerage fees reap the largest rewards over the long-term. Ironically, the greatest gains come from those least likely to “seek performance.”

I suspect that “reversion to the mean” applies to the human psyche as well.

We each have a base level of happiness. We may think that a vast accumulation of wealth will significantly elevate this base level. It will for a time, but eventually the effect will peter off. We will eventually return to our base level, having become accustomed to our expanded manors. We will find new things to need and new reasons why we are lacking. We will obsess over the same clothing stains that we once paid no mind to. We will invent new problems for ourselves, new anxieties, and new chases. We once never thought of owning “the best suit or dress at the wedding.” Suddenly we are comparing our garments to those around us.

Nomads do not escape their problems by moving to new places (their problems follow them). Similarly, we often do not escape ourselves by elevating our own economic class.

We think that a significant loss will permanently lower our base level of happiness, and it will for a time. Eventually, though, the loss will normalize, and we will become accustomed to living with what we lack.

There is a quote by LaFargue that bring to my mind this idea and our penchant for reverting to our mean:

“The working man, enduring hardships from childhood and knocking about the street and the shops, is accustomed to enduring the troubles of life; the intellectual, brought up in a hot-house, has the life bleached out of him by the shadow of the college walls, his nervous system is over-developed and takes on an unhealthy impression ability. What the working man endures thoughtlessly is to him a painful shock.”

Applying this “reversion to the mean” theory to zen philosophy, it seems apparent that those who are apt to feel their spirits skyrocket from the simplest material pleasure are also apt to crash from the slightest pain. Those who most eagerly crave wealth therefore have some of the weakest spirits, and are the most susceptible to pain. These are the types who are often the most easily corruptible; their souls can be bought cheap because they are eternally fretful of their losses. There is good reason why religions de-emphasize the importance of wealth (and some classify wealth as a sin).

It is for these reasons that I do not wish to race “higher” or “lower,” but rather to ride my own “average” with a smile, and accept my own natural ebb and flow.