Variance explained
How much of the spread in one thing can be accounted for by another. For two variables, it's the square of their correlation: a correlation of 0.5 explains 25%.
In plain English
If practice explains 12% of the variance in performance, the spread in performance would shrink by about 12% if everyone had practised the same amount. It doesn't mean practice gives you 12% of your skill. It also depends on the group: in a group where everyone practises about the same, practice can't explain much of the difference between them, however important it is.
Uncle Gary explains
A review of 88 studies found that practice explained 26% of the differences in performance in games and under 1% in professions. In our simulation of the professions figure, the people who practise most are in the top 10% for results only 13% of the time.
Why it matters for your money
A strategy's signal that 'explains 2% of returns' can sound tiny and still be useful, or sound impressive and vanish on new data. Ask how much of the spread it explains out of sample.
Where we tested it
- Is the 10,000-Hour Rule True? How Much Practice Really Explains
- Customers Said They'd Buy It. Why Didn't They?
- Lesson 27: Multiple Regression: What "Controlling For" Really Means
Related terms
All glossary terms. Educational content, not financial advice.