What Is the Law of Large Numbers?

The l💃aw of large numbers, in statistics, states ♌that the results of a test on a sample get closer to the average of the whole population as the sample size grows. That is, it becomes more representative of the population as a whole.

In the financial world, the law of large numbers has a different meaning: It says that a large entity that is growing rapidly can't maintain that growth pace forever. The biggest of the blue chips with market values in the hundreds of billions are frequently cited as examples of this phenomenon.

Understanding the Law of Large Numbers

🐈 The law of large numbers is defined differently in statistics and in finance.

In Statistical Analysis

It is not feasible to poll every individual in any given population to test a theory. Instead, researchers testꦬ a sample of the population. The law of largᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚe numbers simply states that the bigger the sample, the better the results will mirror the larger population.

Every additional data point gathered can increase the likelihood that the outcome is a true measure of the mean.

The law of large numbers doesn't mean that a given sample or group of successive samples will always reflect the true population characteristics. Nor does it guarantee that successive samples will move the observed average toward the population mean, as is suggested by the 澳洲幸运5官方开奖结果体彩网:Gambler's fallacy, which assumes that a random act, repeated often enough, becomes more 🦩likely to♒ pay off.

In Business

In business analysis, the law of large numbers relates to 澳洲幸运5官方开奖结果体彩网:growth rates over time. It sugges𒁃ts that the percentage rate of growth becomes increasingly difficult to maintaiꩵn. This can be applied to a business or a product.

The phenomenon occurs because the underlying dollar amount is increasing even as the growth rate as a percentage remains constant.

🐷Law of Large Num𒈔bers Statistical Analysis Example

You're more likely to reach an accurate average in statistical analysis by choosing 20 data points instead of relying on just two if, say, you want to determine the average value of a data set of 100 possible values.

There's a greater probability of the two data points being outliers or non-representative of the average and a lower probability of all 20 data points being non-representative.

You may determine the average to be approximately 67.5 if the data set includes all integers from one to 100 and you drew only two values, such as♛ 95 and 40. The average should shift toward the true average as you consider more data points, taking random samplings of up to 20 v🐽ariables.

Law of Large Numbers and Central Limit Theorem

The law of large numbers is related to the central limit theorem in statistical analysis. The central limit th🍬🍨eorem states that the sample mean will be evenly distributed as the sample size increases.

This is often depicted as a bell-shaped curve in which the peak of the curve is the mean and even distributions of sample data fall to the left and righ👍t of the curve.

The law of large numbers also states that data is refined as the sample grows but the law of large numbers more closely relates to the center of the bell curve. It indicates that🃏 the mean of the sample will more closely resemble the mean of the population as the sample size increases.

The law of large numbers therefore relates to the peak or mean of a curve. The central limit theorem relates to t🌠he distribution of a cur🌠ve.

Law of Large Numbers and Business Growth

The term law of large numbers is sometimes used colloquially to refer to the observation that exponential growth rates often don't scale. This isn't related to the law of large numbers but may be a result of the 澳洲🍨幸运5官方开奖结果体彩网:law of diminishing marginal returns or 澳洲幸运5官方开奖结果体彩网:diseconomies of scale.

The same principles can be applied to other metrics such as 澳洲幸运5官方开奖结果体彩网:market capitalization or 澳洲幸运5官方开奖结果体彩网:net profit. Companies with very high ma🅷rket capitalization can find it difficult to maintain a past rate of stock price appreciation.

This conce📖pt can be relevanꦰt to choosing growth versus value stocks.

Law of Large Numbers Business Example

Tesla reported automotive sales, not gross sales, of $24,604 million in fiscal year 2020. The company reported $44,125 million the next year, an increase of roughly 79%. 澳洲幸运5官方开奖结果体彩网:Electric vehicles are an emerging market and Tesla wജas beginning to finally experience economies of scale, experiencing success very quickly.

The law of large numbers indicates that it would become harder for Tesla to maintain this level of productivity as the company continues to grow. It becomes apparent that Tesla simply can't maintain its current growth trajectory due to the underlying dollar values becoming unreasonable, assuming a steady growth rate over several years.

Tesla's Actual Revenue Numbers

The chart above shows Tesla's theoretical annual revenue if its growth rate had continued increasing at the rate of 79% per year in the years after 2020.

In fact, its actual numbers for those years 𒁃were as follows. (All dates are as of March 31 of the year.)

• 2021: $53.82 billion, an increase of 70.67%
• 2022: $81.46 billion, an increase of 51.35%
• 2023: $96,73 billion, an increase of 18.8%
• 2024: $97.69 billion, an increase of 0.95%
• 2025: $95.72 billion, an increase of 1.03%

Tesla revenue for the quarter that ended on March 31, 2025, was $19.33 billion, a decrease of 9.23% year-over-year.

Law of Large Numbers and Insurance

The law of large numbers is also widely used in the 澳洲幸运5官方开奖结果体彩网:insurance industry🅷. It's used to calculate and refine projectedꦓ risk.

Imagine an insurance company is assessing how much to charge customers for car insurance. The company won't be able to adequately determine appropriate risk profiles should it have a small data set.

The company experiences the law of large numbers as it collects more data🥃. It may soon find that young, male drivers are most likely to cause an accident. This larger sample becomes more representative of driving incidents and the insurance company can arrive at more accurate concl💎usions about the appropriate insurance premiums to charge.

The law of large numbers also allows insurance companies to d♏eeply refine the criteria in which to assess premiums by analyzing what traits cause higher risk.

The Bottom Line

For researꦚchers, the law of large numbers helps to determine the size of the data sample needed to r🐟epresent the population.

For stock analysts, the♚ law of large numbers is a warning sign. A very large company that is growing very fast may find it difficult to maintain the same rate of gro🔯wth indefinitely.