Sunday, January 20, 2019

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Don't have a crystal ball? Base rates are the next best thing (Link) 
"Obviously, it would be great if we were all psychic and could know how the future would turn out. But we aren’t. Knowing the base rate is the next best thing to psychic ability. How often something has occurred in the past is usually a good indicator of how often it will occur in the future. Base rates are like having a crystal ball. Seeking out the base rate in our decision process reminds us to not put so much weight on our own experience and own opinions. Always asking, “how often does this typically happen?” helps us view the decision from the outside in, rather than the inside out."

The paradox of uncertainty - Counter intuitively, being more uncertain leads to greater accuracy
"When we're aware of our own uncertainty, we're looking for why we're wrong. We're more likely to consider other opinions. We're less likely to be overconfident in whatever answer we find. When we're more uncertain and less confident, we're more likely to be open-minded, leading us to take the outside view. A study found that bringing uncertainty into a group increased the group's ability to correctly identify the perpetrator in a "Murder Mystery" scenario. They were both more likely to be right and, at the same time, more open to the idea that they might be wrong. That might seem to be a paradox, but there turns out to be a strong correlation between astute decision-making and a willingness to recognize—and even embrace—uncertainty. These findings echo the famous Dunning-Kruger effect from cognitive psychology, in which low-ability individuals have a tendency to overestimate their skills. Sometimes the easiest way to be wrong is to be certain you are right."

Investment grade bond returns