◐ Behavioral
◆ The PatternExtremes revert to the mean — in statistics AND in psychology.
Mean reversion psychology — the principle that extremes in both price and sentiment revert toward their long-term average.
Statistical basis: Regression to the mean (Galton, 1886). Extreme observations are followed by less extreme ones — not by "correction" but by probability.
Market application:
• Extreme euphoria → sentiment reverts toward neutral (prices fall)
• Extreme panic → sentiment reverts toward neutral (prices rise)
• P/E ratios, VIX, and yield spreads all exhibit mean-reverting behavior
Market application:
• Extreme euphoria → sentiment reverts toward neutral (prices fall)
• Extreme panic → sentiment reverts toward neutral (prices rise)
• P/E ratios, VIX, and yield spreads all exhibit mean-reverting behavior
Patience is the key: wait for the extreme, then let mean reversion work in your favor.
Pattern bridge: The belief that extremes return to average — a psychological trust in the central limit theorem. In ML, normalization layers enforce mean reversion on activations.