If monthly retail sales of a good at locations A and B outperform expectations by 1 and 2 standard deviations respectively, which location should expect a greater decline in sales the following month?
1 Answer
Nov 23, 2015
This problem applies to the reversion to the mean ...
Explanation:
Reversion to the mean in statistics means that the greater the deviation of a random variable from its mean, the greater the probability that the next measured variable will deviate less far from the mean. In other words, an extreme event (such as two standard deviations) is likely to be followed by a less extreme event closer to the mean.
So, location B should expect a greater decline in sales the following month since it is currently the greatest number of standard deviations from the mean.
hope that helped
