Edward Conard

Top Ten New York Times Bestselling Author

  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “Unintended Consequences is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.” - Tyler Cowen, Professor, George Mason University
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
Upside of Inequality Oxford Unintended Consequences

AI Summary. Analysis of Russell 3000 companies finds that return on invested capital tends to regress toward the mean: firms starting with the highest returns saw them decline on average over five years, while those starting with the lowest returns saw them rise. Individual results varied within each group.

Michael Mauboussin and Dan Callahan Morgan Stanley
Date Posted:
Is Database:
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Return on Invested Capital (ROIC) for both high-return and low-return firms tends to regress towards the mean, according to 2016-21 Russel 3000 data.

Does return on invested capital regress toward the mean over time?

Core argument: Russell 3000 data for 2016–21 show Return on Invested Capital regressing toward the mean, with high-return firms' average ROIC falling and low-return firms' average ROIC rising over the five-year period.

Analysis of Russel 3000 data from 2016-21 reveals that Return on Invested Capital (ROIC) for both high-return and low-return firms tends to regress towards the mean. High-return businesses saw their ROICs decrease on average, while low-return businesses experienced an increase, illustrating the concept of regression toward the mean, where extreme outcomes are followed by more average results. The data, segmented into quintiles based on 2016 ROICs, tracked each cohort over five years, highlighting this trend. Despite this general pattern, some high-ROIC firms improved further, and some low-ROIC firms did not see gains, indicating variability within the broader trend. This regression effect underscores the dynamic nature of business performance and the influence of market forces on financial metrics.

Takeaways by Macro Roundup® AI

  1. Russell 3000 data for 2016–21 show Return on Invested Capital regressing toward the mean, with high-return firms' average ROIC falling and low-return firms' average ROIC rising over the five-year period.
  2. The analysis sorted Russell 3000 companies into quintiles by their 2016 ROIC and tracked each cohort for five years, finding extreme initial outcomes followed by more average results.
  3. Variability persisted within the regression pattern, as some high-ROIC firms improved further while some low-ROIC firms recorded no gains.

Russel 3000 data from 2016-21 shows that ROICs for the high-return businesses go down on average and the ROICs for the low-return businesses go up on average as results regress towards the mean

“…Historical results show that ROIC tends to regress toward the mean. Regression toward the mean says that outcomes that are far from average are followed by outcomes with expected values closer to the average. Exhibit 5 breaks the population of companies into quintiles based on their ROICs in 2016 and follows each cohort for five years. It shows that the ROICs for the high-return businesses go down on average and the ROICs for the low-return businesses go up on average. This simple picture belies a lot of richness in the data. Some businesses start with high ROICs and get even better. Others have low ROICs that don’t improve. But regression is powerful…”

Michael Mauboussin and Dan Callahan, "Return on Invested Capital,"Morgan Stanley, October 6, 2022, https://www.morganstanley.com/im/publication/insights/articles/article_returnoninvestedcapital.pdf

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