Wednesday, January 22, 2014

The Regression Towards Mediocrity

My blog title (The Theory of Mediocrity) has deep roots to statistical theory. Mathematician Francis Galton first coined the phrase “regression towards mediocrity” or what is often referred to as “regression to the mean”. Galton’s statistical analysis of the height of children versus the height of their parents yielded an amazing outcome. Children are more mediocre than their parents: they tend to be “on average” closer to the mean height, the mean weight, the mean intelligence of the population than were their parents. In the case of height the results illustrated children of parents who are one inch taller than the general population tend on average to be only about two-thirds of an inch taller than the population. Conversely, if this experiment was preformed backwards the result would indicate a parent’s height would be mediocre when compared to their children’s height. Galton gave birth to linear regression models which I so much enjoy running on sets of data.

About 50 years later, a book published in 1933 by Horace Secrist revealed interesting results. Secrist was a professor of economics at Northwestern University in Chicago. Secrist went on to become an expert in what we would now refer to as Industrial Organization. The book was titled “The Triumph of Mediocrity in Business” and had occupied 10 years of this research. In it Secrist showed in excruciating detail if you grouped firms into performance categories in some initial year, and then followed them in subsequent years, that the initially most successful tended to do worse over time, while the least successful tended to improve. Secrist’s conclusion was that American business was “converging to mediocrity.”

Of course I believe these outcomes are not necessarily surprising. In the case of economics, there are many external variables that dictate corporate success. One huge variable for corporate success is government and political intrusion. The government punishes more successful businesses with higher taxes and more rules and regulations. The media and public also tend to ostracize successful big companies as being evil and therefore, they face more scrutiny such as union pressure. Meanwhile, smaller and less successful businesses do not face these same financial, regulatory, and political problems. This makes it easier for them to become more successful over time. However, their ultimate success will also be limited to the restraints placed on them by governing bodies. In other words, government intrusion in the form of taxes and regulations restrict incentives for companies to succeed. For instance, new ObamaCare legislation provides little incentive for companies to offer health insurance, expand their workforce above 50 employees, and or to provide full-time employment. ObamaCare restricts business opportunities and does nothing to incentivize success.

Our educational system is a good example of regression towards mediocrity policy. The government pours money into programs to help underperforming children, such as Title I, but spends little money on advancing overachieving children. The goal is to have students pass a minimum set of guidelines and the government cares little about maximizing the learning experience for exceptional students. And it is the few exceptional students that will make the biggest impact on society, not those students that are the norm. Socialism and wealth distribution policies are also excellent examples of government forcing a regression towards mediocrity. Government and political intrusion is a good example as to why businesses are learning to evolve by finding loopholes in tax policy and to shift manufacturing facilities overseas. As government grows in political power, companies are forced to make unpopular decisions to survive the grasps of mediocrity.

The Theory of Mediocrity is about the effects government intrusion has on the regression towards mediocrity on the American people. The regression toward mediocrity was statistically proved by Galton and Secrist, but it is my belief government plays an integral role in this phenomenon.

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