Question

What is the law of small numbers theory? Why is it important?

What is the law of small numbers theory? Why is it important?

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Answer #1

People believe that small samples drawn from a population shall resemble the population. It is true that large samples resemble the population, however it is not true for small ones. We can say that “the law of small numbers” is a fallacy.
Example: Suppose, a mutual fund manager gave above average returns for last 3 years consecutively. Now, many people will interpret that the fund manager is better that average, even though this interpretation is not justified because of the small amount of data.

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