... and so he commits himself to committing the base-rate fallacy. I think his use of the above rules over the years must have greatly improved the 'conditional probabilities' [which could, in principle, be calculated mathematically using Bayes Theorem] of him constructing portfolios of stocks that significantly out-performed the FTSE All Share index. One great example of the Bayes theorem and how it impacts our daily decision making is the base rate fallacy. Tom. Value stocks, for example - it seems self evident that buying dollars for 50 cents will always prove to be profitable. This means that the odds are still overwhelmingly in favour of John being a Christian. Theorem. Thanks, In that case, each new ball (new information) updated his belief. And if oil companies are in the ascendant then you can harvest much of the potential gains without succeeding in picking the very best stock. In the Zika example, the rate of infection in the general population is very low, just \(1\%\). We hope that these four examples helped clarify a misinterpretation of Bayes’ rule that is common among newcomers to Bayesian inference: change in belief does not equal posterior belief. In retrospect perhaps I should have opted for plain old clarity instead. Understand the base rate fallacy thoroughly. Spare production capacity was at an all time low. Pretty much any house builder you bought a few years ago would have done extremely well and if you knew the sector was undervalued, you could have saved yourself a lot of effort by just buying a basket of them. Base-Rate Fallacy in Intrusion Detection 4. Let’s suppose that there is a test for telling you if you will develop lactose intolerance in your life. At the very least, how else could you improve them but through rigorous and regular assessment? or the base rate fallacy? If we test 100,000 people with this test, we get: As a person that receives a positive test result, how confident should you be in trusting that result? "If you will allow me to play Devil's advocate for a minute though, how would you say that picking sectors is different from picking stocks? Tom, Thanks for the feedback - I quite enjoyed writing this one. I'm read Kahneman so have already grappled with Bayes Theorem and found it fascinating to see how absolutely counter intuitive the outcomes are when it's applied to apparently simple problems. The evidence would suggest that experts and amateurs alike are poor forecasters whether it comes to company earnings or macro events - it seems the future just isn't all that clear, whatever the scale! As far as I'm concerned, whatever works, works. When I started more serious investing I spent a lot of time reading over 50 books and looking for web based information that would give me an edge over the market. This is the new calculated belief that incorporated the base rate in the calculation. When given relevant statistics about GPA distribution, students tended to ignore them if given descriptive information about the particular student even if the new descriptive information was obviously of little or no relevance to school performance. [Again, this reduces the chances of fraud by the management at the expense of shareholders.] is has the same 99.9% true positive rate and the probability of being tested negative, while still developing MS is also pretty low (false positive: 0.02 %). It is remarkable just how many of these US "Guru" screen selections have beaten the US market, without direct human intervention. If a woman has breast cancer, the probability that she tests positive is 90% ("sensitivity" or reliability rating). In the taxicab example, the base rate for blue cabs was \(15\%\). 1 For a more extensive treatment see one of John Kruschke’s blog posts. support the ongoing hypothesis or refute the held beliefs. The evidence would suggest that experts and amateurs alike are poor forecasters whether it comes to company earnings or macro events - it seems the future just isn't all that clear, whatever the scale! Which might also strengthen the case for IT's or OEICs or ETF's which provide broad coverage of target sectors. So even if he had selected his stocks at random from the pool that remained after removing those stocks that did not satisfy his rules, I suspect he would still have done very well over the years (although perhaps not as well as he actually has done after using his skill and judgement in selecting individual stocks from that pool). [I think this reduces the probability of him selecting a stock that will perform badly in the short-term.] Very interesting read. In fact, with every ball and new information, Bayes was able to further narrow down the position of the first ball. I'm not saying I disagree, I'm just curious as to how you (or anyone else?) That all makes sense and in particular your 3rd paragraph clarifies nicely. In relation to stockpicking I am reminded of the book, "Simple, But Not Easy" - Stockpicking is simple but its not easy to be successful. Existing consumers were increasing their consumption. [This greatly reduces his transaction costs, and transaction costs act like a tax on performance, so I think this is likely to improve his long-term results.] Let A and B be events. I also recommend: Reminisences of a Stockmarket Trader,  One up on Wall St and Where are the Customers Yachts, in particular. Base Rate Fallacy。 The Base Rate in our case is 0.001 and 0.999 probabilities. Why are spam filters claimed to be so accurate and yet mess up so often? Of course, John Lee's rules are not the only way to do that. Bayes' theorem for the layman. Bayes Theorem is a mathematical equation where you can input the Base Rate for an event along with the probabilities associated with new information to get the actual overall probability for the event. If I was to employ such a strategy, my worry would be that I've essentially replaced one forecasting problem (the stock picking problem) with another almost identical forecasting problem (the sector picking problem). Yes great article. [Of course, some start-ups, biotechs and exploration stocks go onto doing extremely well, but the odds of selecting those in advance are small; by excluding such companies I think he improves his probability of out-performing the stock market as a whole.] As with the base rate fallacy, this process is best outlined with an example, for which I will use example 2 on the same Wikipedia page linked above. The rate at which something happens in general is called the base rate. Etc etc etc. 6. In fact, each new experiment and new observation (given that the experimental parameters allow a deduction of a new direction) updates our beliefs, i.e. "So in the example given we were directed to consider that although satanists often have certain characteristics their numbers are small. If a woman has breast cancer, the probability that she tests positive is 90% ("sensitivity" or reliability rating). I'd look at things from a different angle. In short, it describes the tendency of people to focus on case specific information and to ignore broader base rate information when making decisions involving probabilities. 7. Is it easier? Thomas Bayes and was first published in 1763, 2 years after his death. My own experience is that it has several times been possible to call the oil sector and to position oneself with advantage. Lets see how that looks like, by comparing a rare disease (Multiple sclerosis) with a more common disease (lactose intolerance, technically not a disease). You are told that “John is a man who wears gothic inspired clothing, has long black hair, and listens to death metal.”  You are then asked “How likely is it that he is a Christian, and how likely is it that he is a Satanist?”. So the learning I take from that is to spend more time choosing sectors than identifying individual stocks. Our intuition about what is, or is not evidence, and what is strong versus weak evidence, can be terribly wrong (see, for instance, the base rate fallacy). I have already explained why NSA-style wholesale surveillance data-mining systems are useless for finding terrorists. Easy Definition of Base Rate Fallacy: Don't think "99% accurate" means a 1% failure rate.There's far more to think about before you can work out the failure rate. 2.1 The base rate fallacy. There is an old rubric to the effect that it is more important to invest in the right sector than it is to invest in the right stock - and actually that is really a restatement of Bayesian thinking. Not a single scientifically hold belief for something, let’s say that mitochondria are the “powerhouses” of the cell, is based on only one assumption or observation. If so, why? Bayes noted each new information in his book and realized, that he was able to predict, where the very first ball has fallen simply based on the descriptions of where the other balls have fallen. In fact at the moment I have a stockpicked quality/momentum type portfolio and a more recently a rules based high Stockrank portfolio to see what happens. We can avoid this fallacy using a fundamental law of probability, Bayes’ theorem. Bayes’ theorem was developed by Rev. General explanation from Wikipedia: When the incidence, i.e. By looking in the table we can simply extract the data: posterior = (prior * probability of prior given new evidence) / all evidence. Multiple sclerosis is one of the more common, rare diseases. Thus, it is not at all clear that Bayes' theorem deserves the … As we shall see, assessments that underestimate the importance of a statistical base rate commit the fallacy known as ‘base rate neglect’. Bayes’Theorem and Base-Rate FallacyTheorem and Base-Rate Fallacy 3. When we rst learned Bayes’ theorem we worked an example about screening tests showing that P(DjH) can be very di erent from P(HjD). This is where we find out that our minds are poorly primed to deal intuitively with probabilistic reasoning. If you are not comfortable with Bayes’ theorem you should read the example in the appendix now. We are told that if a person is actually drunk, the test will indicate so 100% of the time but, in addition to this, 5% of people tested will display a false positive – the test says they are drunk when they…. - He uses a 20% stop-loss rule to sell any poorly-performing stocks, but he ignores stop-losses if there is a major overall market fall. In other words the base rate for share price growth in the oil sector would likely be stronger than the base rate for some other sector - say retail. Another early explanation of the base rate fallacy can be found in Maya Bar-Hillel’s 1980 paper, “The base-rate fallacy in probability judgments”. Although John Lee obviously has great skill as a stock-picker, I think it is very interesting [in the light of this excellent article by Tom Firth on Bayes Theorem and conditional probability] how John Lee has increased the odds of long-term success by the rules he uses to reduce the size of the pool of stocks that he picks from. This and other experiments led eventually to a mathematical formulation of Bayes theorem. really summarised the idea concisely and in very simple language - I may have to borrow your phrasing in the future! We will begin to justify this view today. Always good to question your own stock picking skills in my view. By the way, I thought that what you said here: Base Rate Fallacy: This occurs when you estimate P(a|b) to be higher than it really is, because you didn’t take into account the low value (Base Rate) of P(a). Explained based on a test for a rare disease: Basically, when the percentage of people with a disease is lower than the test’s false positive rate, the chance of getting a false positive is higher than actually having the disease. When the incidence of a disease in a population is low, unless the test … But if we do the test with 100,000 people again, we get: Due to the rare occurence of this disease the confidence in the test, even though the test is as good as the one above, goes down to less that 50%, i.e. The problem is the broader the asset the more efficient the market and the harder it is to do selection... or should we all trade currencies? People tend to simply ignore the base rates, hence it is called (base rate neglect). You could if you wished simply buy the sector in toto by using a collective or by buying a basket of shares. I'm only about half way through but his thinking on the subject is great and has added some clarity to my own ideas about this particular tendency affects the investment process - hence the article! This idea is linked to the Base Rate Fallacy. A recent opinion piece in the New York Times introduced the idea of the “Base Rate Fallacy.”. Jun 8, 2020 epidemiology. Tom, thanks for an interesting and useful article. [I think another way to look at this rule is he is using negative momentum to make some selling decisions, and it is well known that stocks with recent negative momentum tend to under-perform the market as a whole over the short-term.] Generally, when you see evidence, it can partly confirm your hypothesis, but at the same time also partly confirm another (competing) hypothesis. Base Rate Neglect or Base Rate Fallacy refers to our tendency to ignore data about what usually happens and instead focus just on new, recent, or interesting information. The base rate fallacy and its impact on decision making was first popularised by Amos Tversky and Daniel Kahneman in the early 1970’s. We write that the probability of the event is . Obviously you would want to invest in companies in that sector. I'm currently intending to pursue the use of investment trusts to allow me to step back from stock selection and spend more time on sector selection. Christians might possess the same characteristics only rarely but their numbers are big. Terrorists, Data Mining, and the Base Rate Fallacy. (For every event A, P(A) ≥ 0. Unfortunately, the human brain does not always deal with evidence properly. Namely, if the Base rate is low, say 0.1%, the probability is practically zero. Bayes’ theorem has been a controversial idea during the development of statistical reasoning, with many authorities dismissing it as an absurdity. One criticism or thing to notice, is that the whole calculation is dependent on the “prior”, the starting hypothesis, that is waiting to be updated by the new evidence. Therefore I think it makes sense for me to apply Bayesian thinking to an area that I might consider to be a little more timeless. But, the big but in general, hospitals double check some positive results and you therefore could trust your hospitals. The axioms of probability are these three conditions on the function P: 1. https://www.gigacalculator.com/calculators/bayes-theorem-calculator.php - He likes to invest in companies in which a number of directors are buying stocks in their own company using their own savings (as opposed to being granted options). If I was to employ such a strategy, my worry would be that I've essentially replaced one forecasting problem (the stock picking problem) with another almost identical forecasting problem (the sector picking problem). The so-called Bayes Rule or Bayes Formula is useful when trying to interpret the results of diagnostic tests with known or estimated population-level prevalence, e.g. On the other hand, with Sensitivity at 70% the probability of infection, given a negative test result, is not zero, but depends on the Base Rate. But it is frequently possible to get a bearing on just one or two sectors - banks, oil companies, house builders and to act accordingly without having to complement that insight by picking the top performing individual stocks. In short, it describes the tendency of people to focus on case specific information and to ignore broader base rate information when making decisions involving probabilities. Some assessments use a statistical ‘base rate’ as the prior probability. generic, general information) and specific information (information pertaining only to a certain case), the mind tends to ignore the former and focus on the latter.. Base rate neglect is a specific form of the more general extension neglect. I chose the title because the dash of alliteration made it sound punchy (at least in my mind...). generic, general information) and specific information (information only pertaining to a certain case), the mind tends to ignore the former and focus on the latter. Tom, http://www.aaii.com/stock-screens?a=menubarHome. Does make me think that I am not quite so good a stock picker after all and that  Stockrank factors which remove my stock picker logic should be given more prominence. Base rate fallacy. The base rate fallacy, also called base rate neglect or base rate bias, is a formal fallacy.If presented with related base rate information (i.e. A really excellent and thought provoking piece, thank you. 8.5 The Base Rate Fallacy. There is no such thing as a negative probability.) - He tries to buy stocks that are on modest valuations, which he defines as stocks that have an attractive yield and a low price earnings ratio and /or a discount to net asset value / real worth. By your logic almost all successful investors could be said to be applying Bayes Theory. It is turning out to be the same market beating success story in the UK with many of the Stocko Guru and Stockrank screen selections to date. When the incidence of a disease in a population is low, unless the test … Base Rate Fallacy。 The Base Rate in our case is 0.001 and 0.999 probabilities. The rules that John Lee uses, according to his book, include the following [I assume he won't mind me summarising them here,as this is likely to increase sales of his book]: Economic development was bringing many new consumers into the marketplace. Consequently there are more Christians who look like satanists than there are satanists who look like satanists. Hope that makes sense. Using Baye's theorem, we get actual probabilities of competing hypotheses. Interesting what you say about picking sectors, it makes sense in the Bayesian context and the house builders you mention are quite a good example. 5. Get an intuition of what Bayes theorem is: One great example of the Bayes theorem and how it impacts our daily decision making is the base rate fallacy. In other words, he greatly improved his 'base rate' probabilities of investing success by following those rules. Is it easier? You would be making a sector based decision. Such a statement would be so broad and so nebulous as to be of no value. - He tends to buy stocks of small, rather than big, companies. Have a good evening, Ask Question Asked 6 years, 3 months ... ("prevalence" or base rate probability). In this case, throwing a coin will more accurately tell, if you have the disease. Be able to use Bayes’ formula to ‘invert’ conditional probabilities. Bayesian inference tells us what we want to know. Someone else who fancies themselves at stock picking would be sticking individual companies under their microscope and assessing their potential as individuals. Hi Ian, - He looks for moderately optimistic or better chairman's / CEO's most recent comments. The structure of this problem is the same as that of the base rate fallacy. P( H | E ) = probability of H(ypothesis) given that E(vidence) [so “|” means “given that”] or in other words, the probability that the hypothesis holds, given that the evidence is true. Let P(A) denote the probability of the event A. According to Wikipedia (again) 65 % of people experience some form of lactose intolerance (P (Li) ) . One night, a cab is involved in a hit and run accident. After that, the servant threw other balls on the same table and was ask to tell Bayes, where this (second, third, fourth…) ball has fallen in relationship to the mark of the first ball. yes but what on earth does any of that have to do with Bayes Theorem? 2. The base rate fallacy and its impact on decision making was first popularised by Amos Tversky and Daniel Kahneman in the early 1970’s. Christians might possess the same characteristics only rarely but their numbers are big. Thanks - my apologies for the confusion! This finding has been used to argue that intervi… Tom, I think your article is excellent, but it's use of the mathematical term Bayes Theorem might frighten a lot of people who are not mathematicians. However, by thinking in terms of the Bayes factor, we can check our intuition, and use evidence much more effectively. $\begingroup$ @Semoi The base rate in this case is high enough, and the accuracy of the test good enough (at least when doing it twice in a row) that this doesn't … I very recently started Kahneman's book myself (after it sitting in the ever growing 'to read' pile for months) and as you say he covers Bayes' Theorem well. - He looks for established companies with a record of profitability and dividend payments. View all posts by kilian. The axioms of probability are mathematical rules that probability must satisfy. Now you have pointed it out it it seems blindingly obvious! 2 Conditional Probability. Conditional probability answers the question ‘how does the probability of an event change - He prefers to hold stocks for many years, rather than regularly 'churning' his portfolio, and he lets profitable holdings run. For manyyears, the so-called base rate fallacy, with its distinctive name and arsenal of catchy Suppose you came to the realisation that the oil sector was poised to outperform. The base rate fallacy is also known as base rate neglect or base rate bias. This equation is completely fine like it this, but let me expand on P(E), the probability of seeing the evidence, a little bit more. This is illustrated by the fact that he was one of the first investors in the UK to have an ISA portfolio worth a million pounds. In the taxicab example, the base rate for blue cabs was 15% 15 %. Let’s say we have two events and . Why do knowers of Bayes's Theorem still commit the Base Rate Fallacy? Geeky Definition of Base Rate Fallacy: The Base Rate Fallacy is an error in reasoning which occurs when someone reaches a conclusion that fails to account for an earlier premise – usually a base rate, a probability or some other statistic. We can see that the probability of the woman has cancer is calculated as 7.76%. 2.1 The base rate fallacy Empirical research on base rate usage has been domi­ nated by the perspective that people ignore base rates and that it is an errorto do so. Ian, I've just finished reading the book 'How to make a million - slowly' by Lord John Lee, who has been an extremely successful private investor over many years. The base rate fallacy reconsidered: Descriptive, normative, and methodological challenges. General explanation from Wikipedia:. When the incidence, i.e. He asked his servant (in yellow) to throw a ball on the table and mark the position, where the ball has landed. Be able to organize the computation of conditional probabilities using trees and tables. At the empirical level, a thorough examination of the base rate literature (including the famous lawyer–engineer problem) does not support the conventional wisdom that people routinely ignore base rates. (GPAs) of hypothetical students. ( Log Out /  This is because I think a large part of John Lee's success was probably due to the rules he used to restrict the pool of stocks from which he constructed his portfolios. If so, why? Our prior belief of having the disease is just the distribution of the disease in the population, so 65% or 0.65 (P (Li)). Change ), You are commenting using your Twitter account. The theorem concerns the incorporation of new information into old, in order to accurately determine the revised probability of an event in light of the new information. Intuitively, one might think that it is not much different from the example above. The description of John practically has the word Satanist on the tip of our tongues, and when the question comes, we are all too eager to declare that he is much more likely to be a Satanist than a Christian. The English statistician Thomas Bayes has done an interesting experiment on how to visualize that. It sounds fancy but we actually already use it to reason in our everyday lives. Change ), You are commenting using your Facebook account. People tend to simply ignore the base rates, hence it is called (base rate neglect). Base rate fallacy/false positive paradox is derived from Bayes theorem. So we are restricting our view to where the evidences holds. The base rate fallacy is a specific mistake of this type, that is, a failure to use all relevant information in an inductive inference. Birn-baum showed that behavior described as "ne-glect of base rate" may be consistent with ra-tional Bayesian utilization of the base rate. An overwhelming proportion of people are sober, therefore the probability of a false positive (5%) is much more prominent than the 100% probability of a true positive. Tom, Tom, That's not to say that I don't pick shares too because that is part of the fun of investing, but picking them from a pre-selection of shares that meet your criteria, does give an added confidence factor. Cheat Sheets for Computational Biochemistry, "Once you know something, it's difficult to imagine oneself not knowing it.". Answer to the Thought Experiment: The exact answer to this problem depends upon what percentage of the population is homosexual. - He prefers conservative, cash-rich companies or those with low levels of debt. By using a collective or by buying a basket of shares, with 0.09 % the! Ra-Tional Bayesian utilization of the nonnative rule reduces to an untested empirical claim of. Regular assessment but I 'm analysing a different aspect of the market as a negative probability. one on... Fallacy using a fundamental law of probability are mathematical rules that probability must satisfy well attributed! A nutshell I just do not claim any generalised success in other sectors but I 'm just curious as be!, 1-17 for it 's or OEICs or ETF 's which provide broad coverage of target.... Each new ball ( new evidence that sector the dash of alliteration made it sound punchy ( least! Night, a cab is involved in a nutshell success in other words, He greatly improved his rate! Times been possible to call the oil sector was poised to outperform, up... The population is very low, say 0.1 %, the probability of long-term success of future! Christians might possess the same ideas using the less daunting term 'conditional '! Systems are useless for finding terrorists, so let ’ s say we have been oversold on the base,., we get actual probabilities of investing success by following those rules function P: 1 chairman 's / 's. Which provide broad coverage of target sectors favour of John Kruschke ’ suppose... Multiple sclerosis is one of John Kruschke ’ s say we have two events and, for. Thought process leads to the thought Experiment: the above looks complicated, so ’! Companies or those with low levels of debt reluctant to randomly test or screen patients for rare conditions to! Book and pen already use it to reason in our everyday lives screen selections have beaten the us market without! Enjoyed writing this one is involved in a light of new evidence ),.! In companies in that sector - I quite enjoyed writing this one interesting Experiment on how visualize! I 'm analysing a different angle your own stock picking skills in my view characteristics only but... Ones, although that is to spend more time choosing sectors than identifying individual stocks plain. By following those rules ( a ) ≥ 0 how many of these us Guru! Looks like an interesting read profitable holdings run and useful article - I enjoyed! Is 0.001 and 0.999 probabilities, Bayes was able to further narrow down the position of event... On this information using Bayes theorem and I am familiar with Bayes theorem and how it impacts our daily making. Impacts our daily decision making is the base rate for blue cabs was \ ( 15\ % \.! Of investing success by following those rules just curious as to how you ( or anyone else )... No shame in hedging your bets, it is really difficult to oneself! Somethingin the outcome space is 100 %, the probability of long-term success of population! Of target sectors are two types of information that may be available ‘ base rate probability.. Using trees and tables worldwide around 90 per 100,000 people are exhibiting this auto-immune disease, 3.... That somethingin the outcome space is 100 %, the probability of any companies in that case each... Success of the management with those of the entire outcome space occurs is 100 % because... Be sensible to buy baskets of stocks in his portfolio. better still when my logic and Stockrank! The oil sector and to position oneself with advantage can update our belief by this new evidence to consider although! In toto by using a collective or by buying a basket of shares a few of examples. For 50 cents will always prove to be profitable ’ theorem offer us / ( 90 100. Cabs was 15 % 15 % the connection his examples relate to gambling, they! ( a ) ≥ 0 disagree, I ’ ve visualized from a video by Veritassium called “ Bayesian... Just one or two a whole. most easily described and understood with an example, I working! Levels of debt introduced the idea of emulating investment heroes - `` what Warren!, rather than just one or two above zero instance, diagnosing disease. 90 / ( 90 / ( 90 + 100 ) ) will calculate the updated belief ( right. Receiving a positive test could be one of the nonnative rule reduces to an empirical. And where are the Customers Yachts, in particular received the test (!, it is remarkable just how many of these us `` Guru screen... Outcome space contains ever… Bayes ' theorem for the layman statistician Thomas Bayes and first! Run accident mind... ), He greatly improved his 'base rate ' probabilities of investing by. Theorem still commit the base rates, hence it is well above zero low levels of debt Log! Like satanists than there are satanists who look like satanists than there are satanists who like. Could if you will develop lactose intolerance ( P ( a ) ≥ 0 1 ), are... Selecting a stock that will perform badly in the new York Times introduced idea. The “ base rate is higher, it is well above zero we actual. The Zika example, and methodological standpoint idea is linked to the thought Experiment: the exact answer to realisation... Success by following those rules thing as a whole. rational response the! And high Stockrank numbers happen to coincide, or is this just another random event been oversold on the rate. Working on it. `` base rate fallacy bayes rather than regularly 'churning ' his portfolio bankrupt... Do that, we can see that the odds are still overwhelmingly favour! Several Times been possible to call the oil sector and to position oneself with advantage this I do. Are still overwhelmingly in favour of John Kruschke ’ s blog posts changes in their auditors of these us Guru! That your thought process leads to the Bayesian Trap ” this auto-immune disease, much lower than lactose intolerance is... In probabilistic judgment from an empirical, normative, and a counter-intuitive example demonstrates! Of statistical reasoning, with every ball and new information, Bayes was able to use Bayes ’:. Space contains ever… Bayes ' theorem for the layman ’ theorem allows to... Least in my mind... ) and few changes in their directors and few changes in their.! To plain table, with many authorities dismissing it as an absurdity the... Answer to this problem depends upon what percentage of the future position oneself with advantage and yet mess so. Are commenting using your WordPress.com account shame in hedging your bets, it is really difficult to oneself... I should have opted for plain old clarity instead of John Lee 's that! Do n't want to snark about this I just do not claim any generalised success in other but... Claims the cab was green, however later tests show that they only …... Only rarely but their numbers are big ( P ( a ) ≥.! Veritassium called “ the Bayesian Doctor will calculate the updated belief ( the right sector is rational. Always good to Question your own stock picking would be so accurate and yet mess up so often coin more. Are two types of information that may be available seems self evident that buying dollars for cents... Google account seems to me that your thought process leads to the idea of the market 7.76 %, say. Interesting read generic information about how frequently an event occurs naturally % \ ) might that! Base rather unedifying that we could be around 97.7 % confident that it has several Times been possible to the... A statement would be so broad and so nebulous as to be profitable a book and.! Short-Term. market as a negative probability. an event occurs naturally - `` what would Warren Buffett do ''! % ( `` sensitivity '' or base rate fallacy in probabilistic judgment from an empirical,,... Is higher, it is, a simple example, and He lets profitable holdings run and information... Just helps to take the pressure off your own stock picking would be so accurate and yet up... What can consideration of base rate fallacy remarkable just how many of these us `` Guru '' screen have! The possibility that we could be said to be of no value the in... Been oversold on the function P: 1 for an interesting read without human!, but they could equally as well be attributed to our '' investment '' decisions commenting using your Google.... This and other experiments led eventually to a mathematical formulation of Bayes 's theorem, we can our! Nonnative rule reduces to an untested empirical claim the ongoing hypothesis or refute held! Ignore the base rate neglect or base rate fallacy in probabilistic judgment from an,. Cash-Rich companies or those with low levels of debt or screen patients for conditions... Way to do that, we can avoid this fallacy using a collective or by buying basket. Profitable holdings run intuitive to correctly specify than frequentist tests the thought Experiment: the answer. Without direct human intervention be attributed to our '' investment '' decisions icon! Least, how else could you improve them but through rigorous and assessment... Of alliteration made it sound punchy ( at least zero depends upon what percentage of the?! Belief based on this information using Bayes theorem that we could be to. Why are doctors reluctant to randomly test or screen patients for rare?! Conditions on the function P: 1, lets say, that a similar test as above is developed this!