Belief in mean reversion and the law of small numbers

Jawwad Noor () and Fernando Payro ()
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Jawwad Noor: Department of Economics, Boston University
Fernando Payro: Universitat Autonoma de Barcelona and Barcelona School of Economics

Theoretical Economics, Forthcoming

Abstract: Studies find that people systematically underestimate the likelihood of streaks in a random sequence. In a canonical coin-tossing environment, this paper shows that the evidence can be explained by a belief in mean reversion. Such beliefs are represented as if the bias of the coin is history-dependent and “self-correcting”. In a Bayesian inference setting, a belief in mean reversion ensures that the agent never rules out the true parameter.

Keywords: Law of small numbers; belief biases; gambler's fallacy; learning; misspecified beliefs (search for similar items in EconPapers)
JEL-codes: D01 D9 (search for similar items in EconPapers)
Date: 2026-04-29
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