process
Start from the base rate
The rule
Before you fall for the exciting story of this one case, ask how often things like it actually work out. The wide outside view beats the narrow inside view.
Where it flips
Base rates can mislead when the case truly is different. Sometimes a company really does break the old pattern for good reasons. Clinging to the average can blind you to a real exception.
Mauboussin borrows an idea from Kahneman: the inside view versus the outside view. The inside view is the tempting special story: this IPO is special, this pattern is different, this founder is a genius. The outside view asks a boring question: across all the cases that looked like this, what usually happened? These base rates are dull but far more useful than the story in front of you. Anchor on the base rate, like how new listings usually do after listing, and you get a cheap, strong shield against being swept away by one exciting tale.
A worked example
An IPO is pitched as a sure win. The outside view asks how the last hundred hyped IPOs did one year after listing. That sobering base rate is exactly what the exciting story about this one quietly ignores. [illustrative]
How to spot it
- ·you ask 'how often does this kind of thing work out?'
- ·you check the group's history before believing the single story
- ·you weigh the outside view against the inside view
Michael Mauboussin · Think Twice