The Law of Large Numbers

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The law of large numbers describes that as the number of data points in a scenario increases, the average of the outcomes will approach the expected average. Consider a casino with many games. Results will converge to the casino’s advantage because eventually more gamblers will lose than those who win based upon the way the games are structured.


Coins

If you flip a quarter 100 times, you expect 50 heads and 50 tails. However, you may get more of either side of the coin because this is a small data set. However, if you repeat this 100 quarter flip exercise 20,000 times, the average number of heads and tails will get extremely close to 50% equivalency as the number of data increases.

So What?

The law of large numbers justifies why averages from large data sets are significantly more reliable estimates of likely results. From political polling, corporate quality control, insurance risk projections, and market action, the law of large numbers appears to be very helpful in making accurate predictions.

The more data collected, the closer you get to the actuality of the situation you are evaluating and the better decisions you can make based on the information available.

-Zac