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The Law of Small Numbers and Compliance Programs

The Law of Small Numbers and Compliance Programs

by Jason Norman Lee

Managing Director of Legal and Regulatory at Temasek

Jun 07, 2023


Humans like to make inferences. That by itself is not an issue. It’s only natural that with resource and brain-capacity constraints, one extracts some samples from a data-rich environment and draws conclusions. Technically, this process is the selection of a subset (a statistical sample) of data from within a larger statistical population to estimate characteristics of that larger population. 

However, an issue surfaces with the incorrect belief that small samples are likely to be highly representative of the populations from which they are drawn, similarly to large samples. This is known as the Law of Small Numbers or LSN. Daniel Kahneman and Amos Tversky produced a paper in 1971 discussing this cognitive deficiency. LSN is not only something to be studied in a classroom, but it has found to be present in the fields of economics, business, and even warfare. An example of LSN is the supposed ‘Mozart effect’. A study suggested that playing Mozart music to babies might make them smarter and this sparked a whole industry and initiatives of CDs and videos. 

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