Almost everyone knows that the outcomes they see – the score of a sporting match, the grade on a test or an investment manager’s results – reflect a combination of skill and luck. And when you are dealing with outcomes that couple skill and luck, an important force enters the picture: reversion to the mean.

Most investors and business people nod their head knowingly when they hear about mean reversion. How it works is relatively straightforward: if you have great success at an endeavour, say, a round of golf, you enjoyed a mix of skill and very good luck. Since you are likely to enjoy less luck the next time out on the course, your score will be closer to your average. Similarly, a dreadful round is likely to be followed by a more normal one. In both cases, you have reverted to the mean.