Investing in financial markets involves making informed decisions based on various factors, including historical trends and market patterns. One crucial concept that impacts asset prices is the principle of reversion to the mean. However, failure to understand this principle can lead to detrimental consequences for investors. In this article, we explore how reversion to the mean affects asset prices and highlight the risks associated with overlooking or misunderstanding this important phenomenon. Understanding Reversion to the Mean Reversion to the mean suggests that extreme values or outliers in a dataset will, over time, regress back to the average or mean value. This principle is rooted in the idea that exceptional or atypical events are typically temporary, and the underlying data will eventually return to its long-term norm. In the context of asset prices, reversion to the mean implies that if a security’s price deviates significantly from its historical average, it is likely to correct itself and move back toward that average. Implications for Investors Reversion to the mean can have both positive and negative effects on investors. Let’s explore how: 1. Buying Opportunities When a particular