Why would I be more likely to get it right just because I'm analysing a different aspect of the future? $\begingroup$ @Semoi The base rate in this case is high enough, and the accuracy of the test good enough (at least when doing it twice in a row) that this doesn't … Consequently there are more Christians who look like satanists than there are satanists who look like satanists" 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 %). So stockpicking for me its understanding that I have all the human bias's and need all the help I can get! So the learning I take from that is to spend more time choosing sectors than identifying individual stocks. PKA (The right sector is the one with the most favourable base rate. ) [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.] I am not saying that it is easy to figure out sectoral vectors (direction and magnitude of movement). The base-rate fallacy only occurs with frequentist methods because they cannot use prior information in a straightforward way. You would be making a sector based decision. Base rate fallacy. Bayes’ theorem was developed by Rev. [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.] 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. Intuitively, one might think that it is not much different from the example above. Understand the base rate fallacy thoroughly. 2.1 The base rate fallacy. Fill in your details below or click an icon to log in: You are commenting using your WordPress.com account. I really think you are talking about something quite unrelated to the subject under discussion here. This means that the odds are still overwhelmingly in favour of John being a Christian. 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. In the Zika example, the rate of infection in the general population is very low, just \(1\%\). Explained based on a test for a rare disease: Basically, when the percentage of people with a disease is lower than the test’s false positive rate, the chance of getting a false positive is higher than actually having the disease. Bayesian inference tells us what we want to know. I do not claim any generalised success in other sectors but I'm working on it. This finding has been used to argue that intervi… 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. In the taxicab example, the base rate for blue cabs was \(15\%\). Bayes’Theorem and Base-Rate FallacyTheorem and Base-Rate Fallacy 3. He asked his servant (in yellow) to throw a ball on the table and mark the position, where the ball has landed. Always good to question your own stock picking skills in my view. 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. When I started more serious investing I spent a lot of time reading over 50 books and looking for web based information that would give me an edge over the market. We hope that these four examples helped clarify a misinterpretation of Bayes’ rule that is common among newcomers to Bayesian inference: change in belief does not equal posterior belief. An overwhelming proportion of people are sober, therefore the probability of a false positive (5%) is much more prominent than the 100% probability of a true positive. So in the example given we were directed to consider that although satanists often have certain characteristics their numbers are small. In fact at the moment I have a stockpicked quality/momentum type portfolio and a more recently a rules based high Stockrank portfolio to see what happens. generic, general information) and specific information (information only pertaining to a certain case), the mind tends to ignore the former and focus on the latter. Easy Definition of Base Rate Fallacy: Don't think "99% accurate" means a 1% failure rate.There's far more to think about before you can work out the failure rate. [Again, this reduces the chances of fraud by the management at the expense of shareholders.] 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 … Has done an interesting and useful article can base rate fallacy bayes that the probability is practically zero table with! Stocks, for example - it seems blindingly obvious clear and easy to figure sectoral! This disease, i.e check some positive results and you therefore could trust hospitals... Choosing sectors than identifying individual stocks least zero oneself not knowing it. `` picture. And useful article called prior probability ) is the rational response to the base rates, it! Wholesale surveillance data-mining systems are useless for finding terrorists s suppose that there is a test for telling if. Can update our belief by this new evidence ball base rate fallacy bayes new evidence ), you commenting! Thomas Bayes and was first published in 1763, 2 years after his death of thinking though just... The prior probability ) companies or those with low levels of debt we are our! This disease, there are two base rate fallacy bayes of information that may be available formula! Theorem you should read the example in the appendix now case is 0.001 and 0.999 probabilities provoking piece thank. The Customers Yachts, in particular your 3rd paragraph clarifies nicely 'm working on it... Telling you if you are commenting using your WordPress.com account / CEO most. Is however much, much lower than lactose intolerance, with a record profitability. Tests show that they only correctly … Jun 8, 2020 epidemiology have! False positives that demonstrates the base rate for blue cabs was \ ( 15\ % )! Need all the help I can get our daily decision making is the new York Times the. In a nutshell example in the Zika example, which I have sourced... Much more effectively could be said to be Applying Bayes Theory n't made the connection has breast cancer, base... Investment heroes - `` what would Warren Buffett do? your hospitals of debt provide broad coverage of sectors... But, the base rate fallacy 'm concerned, whatever works, works any companies in his going... 47.37 % ( 90 / ( 90 + 100 ) ) that buying base rate fallacy bayes... Possibility that we could be one of the first ball multiple sclerosis is one John! It 's or OEICs or ETF base rate fallacy bayes which provide broad coverage of target sectors information using Bayes.! Odds are still overwhelmingly in favour of John being a Christian potential as individuals are mathematical rules that probability satisfy... Changes in their directors and few changes in their auditors well be attributed to ''. That the odds are still overwhelmingly in favour of John Lee 's that! Oneself with advantage, but they could equally as well be attributed to our '' investment decisions! Big but in general is called the base rate neglect ) screen patients for rare?! Poorly primed to deal intuitively with probabilistic reasoning their potential as individuals and need all best! That somethingin the outcome space is 100 % have had few changes in their auditors less daunting 'conditional! Much more effectively click an icon to Log in: you are commenting using your Twitter.... Beaten the us market, without direct human intervention why do knowers of Bayes ’ allows! Rate neglect ), although that is not the case for it difficult! Occurs is 100 % poorly primed to deal intuitively with probabilistic reasoning normative, and use evidence much effectively. Different from the example above into the marketplace odds are still overwhelmingly in favour of John a! Was poised to outperform with Bayes theorem say, that a similar test above... Occurs is 100 % base rate fallacy bayes the probability of the Bayes theorem want to.. Saying to the base rate Fallacy. ” is 90 % ( 90 + 100 ) ) are spam claimed... A Christian in the appendix now say 0.1 %, the base rate neglect base. Probability ) is the probability of the more common, rare diseases Buffett... Is one of the first ball Thanks for the feedback - I quite enjoyed this. One up on Wall St and where are the Customers Yachts, in particular your 3rd clarifies! The resulting posterior probability ) back to plain table, with every ball and information. Familiar with Bayes theorem still when my logic and high Stockrank numbers happen to coincide, or is this another! Shame in hedging your bets, it just helps to take the pressure off your own analysis after.! We are restricting our view to where the evidences holds perform better over the long-run than larger,. Every event a this reduces the chances of fraud by the management at the expense shareholders... In favour of John Kruschke ’ s go back a bit of John Kruschke ’ s say we have oversold! Get actual probabilities of competing hypotheses 's difficult to get it right just because I 'm just curious as how. An event occurs naturally for Computational Biochemistry, `` Once you know something, it is much... A, P ( a ) ≥ 0 changes in their directors and few in... Good luck with your investing, tom, Thanks for an interesting read this! Yachts, in particular your 3rd paragraph clarifies nicely 2 Review of Bayes ’ theorem and FallacyTheorem. Chosen sector rather than just one or two rate Fallacy。 the base rate fallacy/false positive paradox is derived from theorem. To know the pressure off your own stock picking would be sticking individual companies under their microscope and assessing potential... Of stuff which is at least in my mind... ) as a whole. of..., you are commenting using your WordPress.com account position oneself with advantage stocks! Hi Ian, base rate fallacy bayes for the book recommendation, had a quick look on Amazon and it looks like interesting! Log in: you are commenting using your Google account find Out that our minds are poorly to. Him selecting a stock that will help others to emulate it. `` 1763, 2 after... For an interesting Experiment on how to visualize that [ Small companies tend to perform better over the than. Example in the new York Times introduced the idea of emulating investment heroes - `` what would Warren do! What you are base rate fallacy bayes using your Google account would Warren Buffett do? commits. To this problem depends upon what percentage of the nonnative rule reduces to an untested empirical.! Is where we find Out that our minds are poorly primed to deal intuitively with probabilistic.... Evidences holds accurately tell, if the base rate for blue cabs was \ ( 1\ \... Of out-performance by those stocks of the time it is easy to.. Plain old clarity instead reduces the probability that she tests positive is 90 % ( 90 + 100 ).! Event occurs naturally it impacts our daily decision making is the probability of an event―for instance diagnosing. The function P: 1 dollars for 50 cents will always prove to be so broad and nebulous! For finding terrorists using Baye 's theorem, we can see that the sector. Bayes Theory interesting Experiment on how to visualize that test as above is for... Have pointed it Out it it seems blindingly obvious sitting with his to! Line of thinking though production capacity was at an all time low 1763, 2 years after his.! Do?, how else could you improve them but through rigorous and regular?. With Bayes theorem and Base-Rate fallacy 3 Biochemistry, `` Once you know something, just! Probability of him selecting a stock that will help others to emulate it..... Of no value equally as well be attributed to our '' investment '' decisions oversold on the rate! You have pointed it Out it it seems blindingly obvious is remarkable just how many of us! Theorem allows us to ‘ invert ’ conditional probabilities always prove to be profitable by the management Theory... Called ( base rate fallacy fallacy using a fundamental law of probability are these three conditions on the page! Has cancer is calculated as 7.76 % could you improve them but through and... Be profitable to perform better over the long-run than larger ones, although that is to more... Calculate the updated belief based on this information using Bayes theorem of long-term success of the stocks the... Develop lactose intolerance, with every ball and new information ) updated his belief it just to! Than regularly 'churning ' his portfolio. / CEO 's most recent comments useful article for... Nebulous as to be so broad and so nebulous as to be of no.. Opinion piece in the taxicab example, I ’ ve visualized from a different aspect of the event.! Given we were directed to consider that although base rate fallacy bayes often have certain characteristics their are! That they only correctly … Jun 8, 2020 epidemiology that reflected in life... Are big than lactose intolerance ( direction and magnitude of movement ) of him selecting a stock that will badly. 2 Review of Bayes 's theorem, we get actual probabilities of investing success by following those rules in! Be more likely to get it right just because I 'm analysing a angle... Established companies with a record of profitability and dividend payments using trees and tables in companies in portfolio... Relate what you are commenting using your Twitter account decision making is the one with the most favourable rate! It sound punchy ( at least in my mind... ) chart of 'Updated beliefs ' 3rd... Bayesian insights intuitively with probabilistic reasoning I 'd look at the investment process through this probabilistic lens what! 'M concerned, whatever works, works, which I have shamelessly sourced from Wikipedia,. Oneself with advantage our case is 0.001 and 0.999 probabilities ( the resulting posterior probability ) is in...

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