Base rate fallacy

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People tend to ignore background information relevant to the problem such as base rate. We tend to assume that causes (choices) and consequences (outcomes) are related even if they are not. For instance: participants use base rate data incorrectly then analysing a personal description. Kahneman and Tversky (1972) illustrated this with an example of engineers and lawyers.

Example

Participants were given a brief description of a person who enjoys puzzles, is mathematically inclined and introvert. Some participants were told this description was selected from a group of 70 engineers and 30 lawyers, others were told this came from a list of 30 engineers and 70 lawyers.

Individuals were asked to estimate the probability that the person described was an engineer. Even though people admit that the brief description does not affect means of distinguishing between the two, most tended to believe that the description came from an engineer. Their assessments were relatively impervious to differences in base rates of engineers (70% v.s. 30% of the whole list).

Use base rate data correctly

Nevertheless, participants use base rate data correctly when no other information (e.g. personal description) is provided. This means, people understand the relevance of base rate information but then to disregard such data when individuating data are also available.

Consequences

Ignoring base rate has many unfortunate implications. Entrepreneurs ignore the base rate for business failures. Graduate school admissions tend to favour applicants who have come from institutions with lenient grading, ignoring the fact that grading might have been lenient and thus everybody in the school achieved high grades.

Bazerman, M.H. and Moore, D.A., 1994. Judgment in managerial decision making (p. 226). New York: Wiley.

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