Asked by Matthew Pereira on Jun 14, 2024
Verified
Provide an explanation of the law of small numbers.
Law of Small Numbers
A cognitive bias that leads people to draw broad conclusions from small data sets or limited observations.
- Explain the law of small numbers and its role in misjudging statistical probabilities.
Verified Answer
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Nikki AllenJun 16, 2024
Final Answer :
If an investor believes in the law of small numbers, they believe that a small sample of outcomes always resembles the long-run distribution of outcomes. If an investment guru has been right five out of seven times recently, the investor might believe that their long-run average of being correct is also five out of seven. The law of small numbers is related to recency bias and to the gambler's fallacy.
Learning Objectives
- Explain the law of small numbers and its role in misjudging statistical probabilities.