Base rate

How often an outcome occurs across the whole population of similar cases, before you know anything specific about the one in front of you.

Example

Before judging a fund manager's strong three-year run, ask what share of all managers beat their benchmark over any three years - that share is the base rate.

Important

A vivid story about the specific case will almost always feel more informative than the base rate, and is almost always less predictive.

Related terms

  • Expected value — The average outcome of a decision if you could repeat it many times: each possible result multiplied by its probability, all added together.
  • Survivorship bias — Drawing conclusions from the examples that lasted long enough to be visible, while the ones that failed have quietly left the sample.
  • Selection bias — Any situation where the sample in front of you was not assembled in a way that represents the whole population, so conclusions drawn from it do not generalise.

Lessons that explain it

  • How many do you have to see to make one investment? — Put real numbers on your funnel and two things become obvious: how fast a first look has to be, and how much sourcing you actually need to support the portfolio you are trying to build. (12 min)
  • Buying the story — A good narrative is not evidence, and it is the most reliable way to end up paying a price that only works if the story is much better than it says. (8 min)
  • The same company can be a good investment at one price and a bad one at another — An investment decision weighs the range of outcomes against the price paid. Scenario-based expected value shows how quickly a higher price erodes the return from the same company. (11 min)
  • A memo is a thinking tool before it is a selling document — Two versions of the same memo can describe the same deal and do opposite jobs - one is written to get to yes, the other is written to find out whether yes is correct. (9 min)
  • If you cannot write a good bear case, you do not understand the deal — A bear case built from generic risk categories teaches nothing. A bear case built from 'what would have to be true' names the specific number the whole thesis depends on. (12 min)
  • The committee's job is to break the memo, not approve it — An investment committee that never says no has stopped being a check on anything. The difference between a real pressure test and a rubber stamp is almost never visible from the approval rate alone. (13 min)

All 578 terms in the Investing glossary