Base rate fallacy

🧠 Psych - 111 / 200

Hello!

Let’s learn about the Base rate fallacy.

What is it?

You might focus more heavily on new information without acknowledging how it impacts original assumptions.

i.e. when the base or original weight or probability is either ignored or considered secondary.

Examples -

Where does it occur?

One of the best examples of this fallacy is in College where students are judged based on their majors.

For example, one may conclude that arts students are typecasted as activists with an edgy fashion sense. But is that really true?

Why do I need to know?

Many instances exist in which emotion and psychology heavily influence investor decisions, causing people to behave in unpredictable ways.

To avoid committing the base rate fallacy, we need to take a more active approach to assessing probability, by working on paying more attention to the base rate information available to us and by recognizing that personality and past behaviors are not as reliable predictors of future behavior as we think they are. [1]

References & Studies: -

  1. https://thedecisionlab.com/biases/base-rate-fallacy/

  2. https://www.investopedia.com/terms/b/base-rate-fallacy.asp


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