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