Base Rate Neglect is the all-too-human tendency to ignore the background rate at which some event occurs when trying to assess how probable it is. It's a facet of how our brains are poorly attuned to statistics.
Showing posts with label base rate neglect. Show all posts
Showing posts with label base rate neglect. Show all posts
Thursday, 12 June 2014
Thursday, 22 November 2012
Bayesian Unreason in the Modern World
Unintuatively Rational
Most economic theories make an assumption that humans are rational, but this definition is a peculiarly drawn one as it assumes that we all operate on the basis of Bayes’ Theorem, an idea which is freely bandied about but which very few people can actually describe. There’s a good reason for this – it’s profoundly unintuitive, which makes you wonder if we do think the way the theorem suggests we ought to.
Unintuitive or not every investor should have a working appreciation of the ideas behind Bayesian reasoning, because it’s another one of those mental models we can use to assess the usefulness, or otherwise, of our ideas. And oddly enough, it may be even more fundamental than we think.
Wednesday, 27 October 2010
Cardano’s Gambit
Gamblers ‘Nonymous
Investing is, up to a point, gambling. Most of us don’t think of it in that way but if we conceive of the universe of stocks as a gas of randomly moving particles buffeted this way and that by forces largely beyond their – and certainly beyond our – control then there’s no other conclusion that can be drawn.
However, we don’t really believe this. What we generally believe is that although randomness is pervasive in stocks there’s a pattern that lies beneath the surface which we, in spite all evidence to the contrary, can pick out. For the idea that there are repeatable patterns hidden within apparently random games of chance we can thank one of our more unlikely heroes. Meet Girolamo Cardano, medieval physician, professional gambler and mathematician extraordinaire.
Investing is, up to a point, gambling. Most of us don’t think of it in that way but if we conceive of the universe of stocks as a gas of randomly moving particles buffeted this way and that by forces largely beyond their – and certainly beyond our – control then there’s no other conclusion that can be drawn.
However, we don’t really believe this. What we generally believe is that although randomness is pervasive in stocks there’s a pattern that lies beneath the surface which we, in spite all evidence to the contrary, can pick out. For the idea that there are repeatable patterns hidden within apparently random games of chance we can thank one of our more unlikely heroes. Meet Girolamo Cardano, medieval physician, professional gambler and mathematician extraordinaire.
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