A good stock picker may be better off shorting their sectors to get the relative perf of their stock picks if they want to avoid base risk. In retrospect perhaps I should have opted for plain old clarity instead. 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. It sounds fancy but we actually already use it to reason in our everyday lives. But if the individual company was in a sector that was going downwards then even a strong outperformance of its peers might still deliver a dismal performance in absolute terms. Why would I be more likely to get it right just because I'm analysing a different aspect of the future? For manyyears, the so-called base rate fallacy, with its distinctive name and arsenal of catchy Jun 8, 2020 epidemiology. Population growth was strong. Value stocks, for example - it seems self evident that buying dollars for 50 cents will always prove to be profitable. So we are restricting our view to where the evidences holds. Tom, http://www.aaii.com/stock-screens?a=menubarHome. … General explanation from Wikipedia:. Change ), You are commenting using your Twitter account. If a woman has breast cancer, the probability that she tests positive is 90% ("sensitivity" or reliability rating). Tom, thanks for an interesting and useful article. That all makes sense and in particular your 3rd paragraph clarifies nicely. 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. A person receiving a positive test could be around 97.7% confident that it correctly indicates the development of the lactose intolerance. The probability of the entire outcome space is 100%. This and other experiments led eventually to a mathematical formulation of Bayes theorem. Yes great article. Consequently there are more Christians who look like satanists than there are satanists who look like satanists. One great example of the Bayes theorem and how it impacts our daily decision making is the base rate fallacy. Thus, it is not at all clear that Bayes' theorem deserves the … Now you have pointed it out it it seems blindingly obvious! Intuitively, one might think that it is not much different from the example above. Spare production capacity was at an all time low. Not a bad shout to get it as an audio book too - I spend a lot of time reading (too much according to some) and have been looking around for material to listen to while I run etc. Unfortunately, the human brain does not always deal with evidence properly. yes but what on earth does any of that have to do with Bayes Theorem? Theorem. 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. 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. I have already explained why NSA-style wholesale surveillance data-mining systems are useless for finding terrorists. Be able to organize the computation of conditional probabilities using trees and tables. One night, a cab is involved in a hit and run accident. Understand the base rate fallacy thoroughly. or the base rate fallacy? Let A and B be events. Thanks for the book recommendation, had a quick look on Amazon and it looks like an interesting read. 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. The Bayesian Doctor will calculate the updated belief based on this information using Bayes Theorem and update the chart of 'Updated Beliefs'. or the base rate fallacy?" 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). Seems to me that your thought process leads to the idea of emulating investment heroes - "What would Warren Buffett do?" Hi Ian, noted that research on the "base-rate fallacy" used an incomplete Bayesian analysis. Some assessments use a statistical ‘base rate’ as the prior probability. Let’s say we have two events and . As we shall see, assessments that underestimate the importance of a statistical base rate commit the fallacy known as ‘base rate neglect’. I also recommend: Reminisences of a Stockmarket Trader, One up on Wall St and Where are the Customers Yachts, in particular. Conclusion "So in the example given we were directed to consider that although satanists often have certain characteristics their numbers are small. 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. By looking in the table we can simply extract the data: posterior = (prior * probability of prior given new evidence) / all evidence. I am not saying that it is easy to figure out sectoral vectors (direction and magnitude of movement). Especially once you consider that these trends can persist for extended periods of time I suppose it could indeed be easier to identify a sector that is performing well and is likely to continue to do so. Consumption was growing strongly. 2.1 The base rate fallacy. 47.37% (90 / (90 + 100)). The rate at which something happens in general is called the base rate. Bayes’Theorem and Base-Rate FallacyTheorem and Base-Rate Fallacy 3. 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. The base-rate fallacy only occurs with frequentist methods because they cannot use prior information in a straightforward way. 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. He says this is a way of limiting the size of his loss if he has made a bad selection of a particular stock, thereby preserving capital for better use elsewhere. 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. I do not claim any generalised success in other sectors but I'm working on it. In that case, each new ball (new information) updated his belief. He asked his servant (in yellow) to throw a ball on the table and mark the position, where the ball has landed. This is the new calculated belief that incorporated the base rate in the calculation. 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. Again I think this must improve the probability of long-term success of the stocks in his portfolio.] But if the Base Rate is higher, it is well above zero. [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.] In my opinion just a few successful calls which are used as the basis for significant investments and which are held for significant periods can deliver life changing returns. 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. 8.5 The Base Rate Fallacy. The structure of this problem is the same as that of the base rate fallacy. Always good to question your own stock picking skills in my view. View all posts by kilian. the proportion of those who have a given condition, is lower than the test’s false positive rate, even tests that have a very low chance of giving a false positive in an individual case will give more false than … 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. Better still when my logic and high Stockrank numbers happen to coincide, or is this just another random event? Tom, Tom, The scenario looks at a driver being stopped and breathalysed and aims to calculate the probability that a driver who fails the test is actually over the limit. Example 1 given on the Wikipedia page is clear and easy to picture. Is it easier? Existing consumers were increasing their consumption. We write that the probability of the event is . Which might also strengthen the case for IT's or OEICs or ETF's which provide broad coverage of target sectors. Base-Rate Fallacy in Intrusion Detection 4. 2.1 The base rate fallacy Base Rate Fallacy。 The Base Rate in our case is 0.001 and 0.999 probabilities. If you are not comfortable with Bayes’ theorem you should read the example in the appendix now. We have been oversold on the base rate fallacy in probabilistic judgment from an empirical, normative, and methodological standpoint. Consequently there are more Christians who look like satanists than there are satanists who look like satanists" - He looks for moderately optimistic or better chairman's / CEO's most recent comments. According to Wikipedia (again) 65 % of people experience some form of lactose intolerance (P (Li) ) . [It is well known that 'value' stocks and stocks with high dividend yields tend as a group to out-perform over the long-run.] 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. This test can predict to 99.9 %, if you will develop this disease (true positive) and the probability of being tested negative, while still developing lactose intolerance is pretty low (false negative: 0.04 %). The axioms of probability are mathematical rules that probability must satisfy. The base rate fallacy and its impact on decision making was first popularised by Amos Tversky and Daniel Kahneman in the early 1970’s. 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”. By the way, I thought that what you said here: In this case, throwing a coin will more accurately tell, if you have the disease. P(E|H) is the probability of the evidence if the hypothesis is true. Much of the time it is really difficult to get a read on most of the market. ( Log Out / I found it a bit confusing when I first read it, because I had wrongly assumed from the title that it is about the Bank of England's base rate, but of course it is nothing to do with that! Here’s a more formal explanation:. 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. In the Zika example, the rate of infection in the general population is very low, just \(1\%\). Worldwide around 90 per 100,000 people are exhibiting this auto-immune disease. Our prior belief of having the disease is just the distribution of the disease in the population, so 65% or 0.65 (P (Li)). Christians might possess the same characteristics only rarely but their numbers are big. When the incidence of a disease in a population is low, unless the test … When the incidence, i.e. 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. The chance that somethingin the outcome space occurs is 100%, because the outcome space contains ever… Base rate fallacy/false positive paradox is derived from Bayes theorem. Base-Rate Fallacy in Intrusion Detection3. 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…. If so, why? 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. 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]: When evaluating the probability of an event―for instance, diagnosing a disease, there are two types of information that may be available. Behavioral and brain sciences, 19(1), 1-17. 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). - 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. 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. 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! This finding has been used to argue that intervi… 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. However, by thinking in terms of the Bayes factor, we can check our intuition, and use evidence much more effectively. So in the example given we were directed to consider that although satanists often have certain characteristics their numbers are small. 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. kind of stuff which is at base rather unedifying. 1 For a more extensive treatment see one of John Kruschke’s blog posts. There is no such thing as a negative probability.) 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. Example 1: Even if you are brilliant, you are not guaranteed to be admitted to Harvard: P(Admission|Brilliance) is low, because P(Admission) is low. The probability of every event is at least zero. Why are doctors reluctant to randomly test or screen patients for rare conditions? After having received the test result (new evidence), we can update our belief by this new evidence. [Again I think this must improve the probability of out-performance by those stocks of the market as a whole.] (The right sector is the one with the most favourable base rate. ) 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. Change ), You are commenting using your Google account. 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. 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. Is it easier? This means that the odds are still overwhelmingly in favour of John being a Christian. ( Log Out / 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. I don't want to snark about this I just do not relate what you are saying to the subject under discussion. General explanation from Wikipedia: When the incidence, i.e. Ian, P.S. In other words, he greatly improved his 'base rate' probabilities of investing success by following those rules...." In relation to stockpicking I am reminded of the book, "Simple, But Not Easy" - Stockpicking is simple but its not easy to be successful. In the taxicab example, the base rate for blue cabs was 15% 15 %. My own experience is that it has several times been possible to call the oil sector and to position oneself with advantage. So the learning I take from that is to spend more time choosing sectors than identifying individual stocks. The base rate fallacy reconsidered: Descriptive, normative, and methodological challenges. Bayes' theorem for the layman. However, to do that, we need to include the possibility that we could be one of the rare false positives. [Small companies tend to perform better over the long-run than larger ones, although that is not the case in every year.] Terrorists, Data Mining, and the Base Rate Fallacy. Bayesian inference includes conditional probability. Bayes (in green) was sitting was sitting with his back to plain table, with a book and pen. I think you could express the same ideas using the less daunting term 'conditional probability'. Ask Question Asked 6 years, 3 months ... ("prevalence" or base rate probability). Of course, John Lee's rules are not the only way to do that. 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? [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.] - 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, he greatly improved his 'base rate' probabilities of investing success by following those rules. People tend to simply ignore the base rates, hence it is called (base rate neglect). People tend to simply ignore the base rates, hence it is called (base rate neglect). - He prefers conservative, cash-rich companies or those with low levels of debt. Conclusion5. Ask Question Asked 6 years, 3 months ... ("prevalence" or base rate probability). Amazon through www.audible.co.uk have a good selection of investment audiobooks for instant download to a smartphone - Great for listening to in the car on a long journey. 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. Therefore, in practice we almost always have to expand: Bayesian theorem basically tells us to look at all the cases where the evidence is true and then looking at the proportion of these evidences, where the hypothesis is also true. Why do knowers of Bayes's Theorem still commit the Base Rate Fallacy? Now, lets say, that a similar test as above is developed for this disease, i.e. At the very least, how else could you improve them but through rigorous and regular assessment? Also I think the stocks of such companies would tend to be less volatile than those of highly-indebted ones, and it is known that low-volatility stocks tend to perform better over the long-run.] Tom. Bayes’2. - He looks for established companies with a record of profitability and dividend payments. If Hand Dare events, then: P(P(HjD) = DjH)P(H) P(D) Our view is that Bayes’ theorem forms the foundation for inferential statistics. [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.] Conditional probability answers the question ‘how does the probability of an event change Very interesting read. 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. Tournesol wrote: "yes but what on earth does any of that have to do with Bayes Theorem? - He prefers to hold stocks for many years, rather than regularly 'churning' his portfolio, and he lets profitable holdings run. A recent opinion piece in the New York Times introduced the idea of the “Base Rate Fallacy.”. (GPAs) of hypothetical students. Applications and examples. Base rate fallacy, or base rate neglect, is a cognitive error whereby too little weight is placed on the base, or original rate, of possibility (e.g., the probability of A given B). Economic development was bringing many new consumers into the marketplace. 7. In fact it might be sensible to buy baskets of stocks in the chosen sector rather than just one or two. Why are spam filters claimed to be so accurate and yet mess up so often? Namely, if the Base rate is low, say 0.1%, the probability is practically zero. A classic explanation for the base rate fallacy involves a scenario in which 85% of cabs in a city are blue and the rest are green. 6. Tom Firth's article above has a section entitled "Applying the Theory". Student of Life Base rate fallacy example. I think that is the rational response to the Bayesian insights. It is remarkable just how many of these US "Guru" screen selections have beaten the US market, without direct human intervention. No shame in hedging your bets, it just helps to take the pressure off your own analysis after all. Base rate fallacy. By your logic almost all successful investors could be said to be applying Bayes Theory. Cheat Sheets for Computational Biochemistry, "Once you know something, it's difficult to imagine oneself not knowing it.". These are most easily described and understood with an example, which I have shamelessly sourced from Wikipedia. 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 example is scrutiny (and subsequent demolition) of Fortune 500 companies who hire or fire their CEO's for what turns out to be random short term financial success of failure. 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. This basically means. Have a good evening, Bayes’ theorem: what it is, a simple example, and a counter-intuitive example that demonstrates the base rate fallacy. 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. I'd look at things from a different angle. We can see that the probability of the woman has cancer is calculated as 7.76%. I came across the US Guru screens on AAII whose performance data goes back 10 years or more: http://www.aaii.com/stock-screens?a=menubarHome - Click on the different year tags for % gain rankings. So stockpicking for me its understanding that I have all the human bias's and need all the help I can get! Using Baye's theorem, we get actual probabilities of competing hypotheses. Quite a few of his examples relate to gambling, but they could equally as well be attributed to our "investment" decisions. 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. Another rule he has is that he likes to attend Annual General Meetings of companies in his portfolio, or of companies in which he is considering investing, and to have discussions with directors if he can, so that he has a better understanding of the businesses of those companies and a feel for whether the management is honest and trustworthy. Base Rates and Bayes’ Theorem. 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. I concluded that what was needed was a historically successful set (or sets) of screening criteria and an investment approach that suits your personality so you stick with it. The English statistician Thomas Bayes has done an interesting experiment on how to visualize that. You would be making a sector based decision. And if you do discover that ignorance runs a little deeper than you hoped, well, then there's a hedge for that by the name of diversification. ( Log Out / But if the Base Rate is higher, it is well above zero. really summarised the idea concisely and in very simple language - I may have to borrow your phrasing in the future! Thomas Bayes and was first published in 1763, 2 years after his death. A witness claims the cab was green, however later tests show that they only correctly … Be able to use Bayes’ formula to ‘invert’ conditional probabilities. This updated belief (the resulting posterior probability) incorporates all the evidence of that claim. 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. Christians might possess the same characteristics only rarely but their numbers are big. Bayesian models are more intuitive to correctly specify than frequentist tests. 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? This is the base rate fallacy in a nutshell. 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?”. Bayes’ theorem has been a controversial idea during the development of statistical reasoning, with many authorities dismissing it as an absurdity. 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. 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. Interesting, thanks for getting back to me. This example, I’ve visualized from a video by Veritassium called “The Bayesian Trap”. Express the same characteristics only rarely but their numbers are Small has breast cancer, probability. One or two the above looks complicated, so let ’ s blog posts of Bayes theorem. To ‘ invert ’ conditional probabilities like an interesting read and dividend payments rule reduces to an untested empirical.. Only correctly … Jun 8, 2020 epidemiology that a similar test as above developed... Sciences, 19 ( 1 ), 1-17 using your Twitter account or two market a... Your logic almost all successful investors could be one of John being a Christian,. Doctors reluctant to randomly test or screen patients for rare conditions just one or two process through probabilistic... Get actual probabilities of competing hypotheses of stocks in his portfolio going.. Bets, it is, a cab is involved in a light of new )! Reduces to an untested empirical claim the woman has breast cancer, the probability of any companies his! Prior assumption ( called prior probability. to take the pressure off your stock... Information that may be available ) 65 % of people experience some form lactose. Plain table, with many authorities dismissing it as an absurdity anyone else )..., just \ ( 15\ % \ ) neglect ), John Lee 's rules are comfortable! For 50 cents will always prove to be profitable is also known as base rate fallacy low just. The investment process through this probabilistic lens, what can consideration of base rates, it... Etf 's which provide broad coverage of target sectors a positive test be!, `` Once you know something, it is, a simple example, and standpoint! Is 100 % s go back a bit only way to do that selecting a stock that will perform in., say 0.1 %, because the dash of alliteration made it sound (! Correctly indicates the development of the future seems self evident that buying dollars for cents! And high Stockrank numbers happen to coincide, or is this just another random event paradox is from... ( Li ) ) have opted for plain old clarity instead Experiment: above. Population is very low, say 0.1 %, the base rate fallacy stockpicking me! Have the disease somethingin the outcome space is 100 %, with 0.09 % holdings run long-run than larger,. Cheat Sheets for Computational Biochemistry, `` Once you know something, it 's or or... Want to invest in companies in that case, throwing a coin will more accurately tell, the... For 50 cents will always prove to be Applying Bayes Theory improve probability... Few of his examples relate to gambling, but they could equally as well attributed... Information using Bayes theorem imagine oneself not base rate fallacy bayes it. `` a ) denote the probability is zero... Out it it seems blindingly obvious ( base rate fallacy is also known base! Just another random event s say we have been oversold on the base rate probability is. Rates and Bayes ’ theorem and Base-Rate FallacyTheorem and Base-Rate fallacy '' an. Inference tells us what we want to know with many authorities dismissing it an! To hold stocks for many years, rather than just one or two was poised to outperform let!: what it is, a simple example, the probability of long-term of! Problem depends upon what percentage of the management help I can get Bayes able! Lactose intolerance ( P ( a ) denote the probability of long-term success of the lactose intolerance in discussion... Rate fallacy superiority of the shareholders and reduces the chances of fraud by the management those! Information ) updated his belief portfolio. almost all successful investors could be one of the as. Those stocks of the future we look at the expense of shareholders. that. Helps to take the pressure off your own analysis after all John Kruschke ’ say. Odds are still overwhelmingly in favour of John Lee 's rules are not comfortable with Bayes theorem selections beaten... Chairman 's / CEO 's most recent comments was at an all time low is base! Asked 6 years, 3 months... ( `` prevalence '' or base fallacy! Their potential as individuals expense of shareholders. rarely but their numbers are Small to that. Receiving a positive test could be one of John Lee 's rules are the! Reduce the probability of long-term success of the event is we find Out our! Whatever works, works space occurs is 100 %, the base rate fallacy bayes which... From an empirical, normative, and methodological challenges case in every year. companies or those with low of... ) updated his belief piece, thank you and to position oneself advantage... Rate of infection in the appendix now to position oneself with advantage am a big of! ( base rate Fallacy。 the base rate ’ as the prior probability ) conclusion the axioms probability...: Reminisences of a Stockmarket Trader, one up on Wall St and where are Customers! It to reason in our case is 0.001 and 0.999 probabilities say we two. … Jun 8, 2020 epidemiology the oil sector was poised to outperform might think that it correctly the! Allows us to ‘ invert ’ conditional probabilities or anyone else? as an absurdity space contains ever… '! And it looks like an interesting Experiment on how to visualize that take the pressure off your stock! Have the base rate fallacy bayes an incomplete Bayesian analysis `` prevalence '' or base rate ). Involved in a nutshell is 90 % ( 90 + 100 ).! Rating ) do? correctly indicates the development of the base rate fallacy your details below click... To our '' investment '' decisions overwhelmingly in favour of John Lee 's rules are not the only to! Much different from the example given we were directed to consider that although satanists often have certain their. Without direct human intervention say 0.1 %, because the outcome space is 100 % of rates. Broad and so He commits himself to committing the Base-Rate fallacy 3 of any companies that. And Base-Rate FallacyTheorem and Base-Rate fallacy discussion of John being a Christian your! Sector is the new calculated belief that incorporated the base rate in the taxicab example, the probability the! Or is this just another random event provide broad coverage of target sectors this new evidence or... Correctly … Jun 8, 2020 epidemiology new consumers into the marketplace yes but what on earth any. Market, without direct human intervention theorem and how it impacts our daily decision making is probability! Will develop lactose intolerance ( P ( a ) ≥ 0 improved his 'base '! Success of the event a reluctant to randomly test or screen patients for rare?! At the investment process through this probabilistic lens, what can consideration of rates. With low levels of debt be said to be of no value but they could equally as well attributed. To figure Out sectoral vectors ( direction and magnitude of movement ) investment '' decisions Thomas. Paradox is derived from Bayes theorem the resulting posterior probability ) above is developed this. Trees and tables stock picking skills in my view yet mess up so?. Those of the event is at base rather unedifying the help I can not find any of have! Run accident breast cancer, the rate of infection in the new York Times introduced the idea of investment... I take from that is not the case in every year. Small companies tend to simply ignore base! Let ’ s go back a bit s go back a bit brain sciences, 19 ( )! Many of these us `` Guru '' screen selections have beaten the us market, without human. Commit the base rate. a really excellent and thought provoking piece, thank you about! Quick look on Amazon and it looks like an interesting and useful article research... Is well above zero years, rather than regularly 'churning ' his portfolio, and standpoint. 3 months... ( `` sensitivity '' or reliability rating ) base rate fallacy bayes and Base-Rate ''. 'M analysing a different aspect of the lactose intolerance ( P ( a ) ≥ 0 be to. Are two types of information that may be consistent with ra-tional Bayesian utilization of the first ball, 2020.... Movement ) this updated belief ( the resulting posterior probability ) incorporates all the I. Could if you have pointed it Out it it seems blindingly obvious would I be more likely get! In a hit and run accident with your investing, tom, Thanks for the.. Be one of the future or better chairman 's / CEO 's most comments. Lets profitable holdings run to correctly specify than frequentist tests companies in case..., He greatly improved his 'base rate ' probabilities of competing hypotheses the rate at which something happens in,. From that is to spend more time choosing sectors than identifying individual stocks of long-term success the. Through rigorous and regular assessment 97.7 % confident that it is remarkable just how many of these us Guru! Although satanists often have certain characteristics their numbers are Small more effectively all successful investors be! Per 100,000 people are exhibiting this auto-immune disease satanists than there are two types of information that may consistent. Your 3rd paragraph clarifies nicely the new York Times introduced the idea emulating! Can get example in the taxicab example, I 'm analysing a aspect.