Mean reversion

The Jolly Contrarian’s Glossary The snippy guide to financial services lingo.™ →Go uptown Index — Click the ᐅ to expand: Glossary Tell me more Sign up for our newsletter — or just get in touch: for ½ a weekly 🍺 you get to consult JC. Ask about it here.

Mean reversion
/miːn rɪˈvɜːʃᵊn/ (n.)
A financial assumption that an asset’s price will tend to converge to its average price over time, or the economic constraints over time that should, rationally control the price. So house prices and incomes should bear a constant relationship over time, and if house prices get out of whack, as they tend to do, the effect will be transitory.

Compare with the related idea of regression to the mean, which means that after any given outlier in a sample, the next event is likely to be closer to the mean. So if you have a great round of golf, expect your next round to be worse. Yesterday’s rooster is today’s feather duster.