DaveWentzel.com            All Things Data

January 2011

"My" Law of Large Numbers

The Law of Large Numbers says that as you repeat an experiment over and over you can expect the average result to more closely equal the expected outcome.  For instance, if you flip a coin you would expect that the more trials you conduct the closer to 50% heads/50% tails you will get.  This is the more or less "official" definition of the Law of Large Numbers.  However, in finance you'll see people refer to the Law of Large Numbers to suggest that as a company grows you can expect it's rate of growth to slow simply because as a company grows it must grow ever more just to maintain a constant growth rate.