Here is a topic you just don’t hear about every day: “The Mental Model: Base Rate Fallacy”

 

I am pretty good at finance, accounting, and MATH. But definitely not at “Expert” level … Mathematics does not come naturally in any way, but it is of critical importance if you want to be successful in business … that’s where my blog article comes from.

 

But I warn you … I am probably going to mess you up mentally a bit here, but I assure you, it is for a good cause … Like, your business and future …

 

“Mental Models” … is something else
I am passionate about. (as well as the numbers).

 

This blog article brings those two together.

A “Base Rate” is the probability of an occurrence (event) when no new facts or specific information is made available. The primary function is to provide a percentage chance something will happen (or not happen), if nothing new or exciting happens that would affect the outcome.

Base rate fallacy refers to our tendency to ignore facts and probability … Instead, we focus on new, exciting, and immediately available information … Base rates are the single most useful number you can use when trying to predict an outcome. Most Business Owners get this horribly wrong.

 

Example 1:  

 

Let’s assume 1% of the population gets virus X (not “the virus”, but virus X so I can save you from Base Rate Fallacy, before we start, thanks to our lovely, accurate, ethical, media that’s immediately available) … Other facts that are critical is that the test is 80% accurate. It detects ppl with virus X 100% of the time but provides a false positive at a 20% rate.

Let’s assume you get tested for virus X and it comes back positive.
What are the odds that you actually have it?

I assume you said 80% (like I would have done prior to understanding this Mental Model), but that is wrong, and you suffer from Base Rate Fallacy … If you are not a mathematician … you said 80% … The Base Rate for virus X was 1% … That is where you start, and the other facts (the positive test) go up from there … Likely landing you at about 5% chance of being positive despite your results.

 

Example 2:

 

One in a thousand people are driving drunk and one thousand people are pulled over and breath tested.

A police officer takes one thousand random breath tests on the side of the road … The test provides a false positive 5% of the time but with 100% effectiveness they test positive when someone is actually over the legal limit … A random driver gets pulled over for no particular reason and blows … tests positive … What are the chances he / she is actually over the limit? … You likely answered 95% like everyone else did … The correct probability is about 2% …

1 driver is drunk (1 in 1000) and there would have been 49 false positives (5%) … Therefore, the probability that one of the drivers is among the 1 + 49.95= 50.95 positive results really are drunk … is 1 / 50.95 = .019627

Do not worry, I get confused too … just know that
most people’s “assumptions” are horribly wrong.

 

When a woman gets interviewed and says, “I got the virus while pregnant after months in strict isolation, my case remains a medical mystery” … I want you to guess what actually happened. But it makes a great headline to freak everyone out, get ratings, and to sell advertising …

Why in the world am I explaining all this to you … 80% of businesses fail … they all need help with their Base Rate Fallacy … The numbers they are using for their Marketing, Financial Decisions, Pricing, and Direction of their Company are ridiculous and not serving them on any level.

 

They need the voice of reason … And sometimes “mathematics” …

 

And the above is part of why I find any Business Owner $10,000 to $50,000 (and many times more) within 60 minutes, and without them having to spend an extra dollar on Marketing or Advertising.

And if the above examples sound crazy and you want a better explanation of Base Rate Fallacy, go here:    https://en.wikipedia.org/wiki/Base_rate