Unit 3 · Level 1 · The narrative trap
Base rates: the antidote
The antidote to stories is one question: 'Of everyone who tried this, how did it go on average?' That's a base rate, the outside view. A large Brazilian study of day traders found roughly 97% of those who persisted for 300+ sessions lost money. The inside view says 'but I'm different.' The outside view replies: so did they.
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What you get asked
What is a base rate?
Not to be confused with a central bank's base rate (that's the Macro course). Here it means the cohort's odds, your starting estimate before any story.
Historically, roughly 10% of active funds beat their index over 15 years. In a group of 500 such funds, about how many would you expect to beat it?
10% of 500 ≈ 50 funds. Thinking in cohorts turns a marketing story ('our fund wins!') into a countable expectation.
Order the outside-view method
Kahneman called the outside view the single best debiasing tool he knew. The discipline is starting from the cohort, not from your excitement.
'Of everyone who tried this, how many succeeded?' is the ___ view.
The inside view stars you and your story; the outside view counts the whole cohort. The second one is where the honest odds live.
'I know most day traders lose, but I'm different.' The base-rate reply:
You might be the exception, but the only admissible evidence is your own measured results, not your confidence. Start from the cohort, then earn the adjustment. 🐜
The rest of this unit
Stories, gurus, and viral feeds: how a good tale empties a portfolio.