Book
Timid Choices and Bold Forecasts: A Cognitive Perspective on Risk Taking
by Daniel Kahneman & Dan Lovallo · 1993 · 2 reading cards
2 cards
Timid Choices and Bold Forecasts: A Cognitive Perspective on Risk Taking · 1993
The base rate is the starting point, and the details of the case are only allowed to adjust it.
Kahneman and Lovallo start from an anecdote. A team writing a school curriculum was estimating when it would finish. Asked how comparable teams had fared, the group's own expert admitted that about 40% had given up and none had finished in under seven years. Everyone had spontaneously taken the inside view: the plan, the obstacles, the scenario. The outside view ignores the details and asks what happened across a class of cases similar in relevant respects. The authors' point is that, applied with equal skill, the outside view is far more likely to yield a realistic estimate. The steps: choose a reference class of similar cases; find the distribution of outcomes, the base rate; place your case within that distribution, asking why it should do better or worse than average; only then adjust, moderately, for the specifics. It applies to any estimate of duration, cost or chance of success — how long coalition talks last, how often sanctions change a regime's behaviour. The trap is a reference class chosen to deliver the answer you wanted, or the claim that ‘our case is unique’, which the authors describe as the almost moral preference for the inside view.
“In contrast, the outside view is essentially statistical and comparative, and involves no attempt to divine future history at any level of detail.”
Timid Choices and Bold Forecasts: A Cognitive Perspective on Risk Taking · 1993
First ask how often things of this sort happen in situations of this sort, and only then look at the details.
Kahneman and Lovallo (1993) describe two ways of forecasting. The inside view starts from your case: the plan, the people, the obstacles you can see, the most plausible scenario. The outside view deliberately sets the details aside and asks how similar cases ended — a reference class — and how often the outcome occurred, which is the base rate. The paper's abstract puts it bluntly: overly optimistic forecasts come from the inside view, which anchors predictions on plans and scenarios. Tversky and Kahneman (1974) had already shown how easily the base rate is lost. Participants told that a group was 70% engineers and 30% lawyers gave a description containing no useful clue a 0.5 chance of belonging to an engineer, whatever proportion they had been given. With no evidence, people use the base rate; with worthless evidence, they forget it. The method is an order, not a choice between the two views: first the reference class and its rate, only then a moderate adjustment for what makes the case different. The traps are a class chosen to deliver the answer you wanted, and a class so narrow it holds three cases; its rate should then be pulled towards that of a broader class. The olivLaw engine has no base-rate step today: the probabilities of the Seldon threads start from constants written into the code, with no declared reference class.
“Overly optimistic forecasts result from the adoption of an inside view of the problem, which anchors predictions on plans and scenarios.”