I'm pasting this from a post that my buddy "Decency" made at the HoN forums more than a year ago, in response to the many complaints I see about the rating system.

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Say we have two "teams" of 5 dice that we roll at the same time. Whichever team has the highest sum after we add all the dice on each team is the winner. You as a new player are given a rating of 1200 and gain or lose points after each game.

The other 9 dice (players) are 100% random, and you only account for 20% of your team's potential, but this doesn't matter, the system still works. We're measuring the one value that isn't random (but that the system doesn't yet know): your skill. Say your true skill is a "6" because you're a great player: you always roll a 6. Because you're a 6, your team will win more frequently than the other team and your rating will go up. Likewise, if you're a 1, your team will lose more than the other team, and your rating will go down.

Now, say you're a 4. You're not great, but you are still above average, and your team will win more frequently because of that. However, you won't help your team win as much as a 6 would, because you aren't as dominant. That doesn't matter: you are above average, so your rating will increase over time. You will seem to have more fluctuation than a 6 because your true skill is so close to the average one, but on average you will still rise.

Now, say you're a 3.5. You're the exact average that a player can be. Obviously though, you aren't going to tie every game. You're going to have winning streaks and losing streaks, and your rating will fluctuate accordingly, maybe you'll even get up to 1400 or down to 1000. But in the end, your rating will settle back to around 1200, because you're an average player.

This doesn't mean that you as a 6 can't get stuck with a bunch of 1's and 2's, dropping in rating because of them. However, when your rating drops from the average you get matched against worse players, maybe on average they only roll a 2 instead of a 3.5, so you have even more of an influence on your team due to your rating being lower than it should be. This leads to you winning, on average, far more frequently until you rise to your true rating level. The inverse is true if you're a 1: you might rise to a higher rating than you should because you played with 6's on your team for a few games in a row, but then you're facing people who can roll 7's and 8's and because you are over-rated, you are even more likely to cause your team to lose. So, your rating will be more likely to drop, and eventually it will settle to its true value.

*QED: Matchmaking works*