What causes people to rapidly lose skill after becoming moderately good at something? I've noticed that people often manage to become moderately good at something, but seem to reach some sort of peak at that level and then rapidly start getting worse again. 

I've seen this happen with videogames (most notably Starcraft 2), pool games, badminton, and even drawing/painting. People can get from complete beginner to a mediocre level in all these things, and then at some point they will start getting worse at them again. Not all the way back to a beginner level, but far enough to notice a serious difference in results. 

If there are no physical changes that are causing this, is there any explanation for this problem with learning?
S-shaped learning curves

As per A Umar Mukthar's comment, the phenomenon is known as an S-shaped learning curve. They have been a known phenomenon in psychology for many decades, and were originally attributed to trial-and-error learning sets (Harlow, 1949). Harlow defined a learning set in the following manner:


  The monkeys learn how to learn individual problems with a minimum of errors. It is this learning how to learn a kind of problem that we designate by the term learning set.


Meta-cognition and intra-individual performance variability

Harlow's explanation has fundamentally not been changed too much, except perhaps that in modern cognitive research, we now call these meta-cognitive strategies rather than learning sets. 

When first encountering a novel problem, participants will adopt one strategy and work to improve their performance on that, but eventually they will discover other strategies. When participants shift strategy thus to an unpracticed strategy, their performance declines, then improves again. 

Because all strategies for the same problem tend to share at least some overlap, as participants explore an increasing proportion of the space of possible meta-cognitive strategies, shifting to a novel strategy requires decreasing amounts of new practice. The magnitude of the performance decline associated with strategy shifts is therefore gradually eliminated with prolonged practice (Murre, 2014).  

References


Harlow, H. F. (1949). The formation of learning sets. Psychological review, 56(1), 51.
Murre, J. M. (2014). S-shaped learning curves. Psychonomic bulletin &amp; review, 21(2), 344-356.