Behavioral Finance
Check the base rate before reacting
A turnaround pitch is persuasive. What did similar companies actually do?
Start with the frequency in a relevant comparison group, then update when new evidence distinguishes this case.
Observed base rate = comparable successes ÷ comparable observations
4 ÷ 20 = 20%. It describes the chosen historical sample and is only a starting point.
Four of 20 comparable firms refinanced within six months. Start with 20% as a descriptive rate before investigating the new borrower.
4 ÷ 20 = 20%. It describes the chosen historical sample and is only a starting point.
Which new fact most directly distinguishes the borrower from the historical cases?