Base Rate Neglect
Ignoring the underlying frequency of an outcome when assessing a specific case.
Formula
Test: a judgement uses case-specific detail while disregarding how often the outcome occurs in the relevant population
Unit
%
In depth
Base rates are the outside view: how often does this kind of thing work out, across everyone who has tried it. Vivid specific detail crowds them out, which is why a compelling story about one company overrides the statistic that most companies in its position fail. In trading, the base rate that matters is how often retail participants in a segment make money, which SEBI has published for equity derivatives and which is stark. Starting from the base rate and adjusting for case-specific evidence, rather than the reverse, is the discipline that corrects this.
Worked example
SEBI's studies found that the large majority of individual traders in equity derivatives lost money over the periods examined. An individual's confidence in their own approach does not change that starting probability; it adjusts from it.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Base Rate Neglect” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.