Base Rates

A base rate is how a given class of situation has historically played out across many cases, and using it means anchoring your judgment there first, before you adjust for whatever seems special about the case in front of you.

The instinct almost everyone has is backwards. You look at a specific situation, get pulled in by its specific, vivid details, the impressive founder, the exciting growth story, the chart that looks unstoppable, and you build a forecast from those details outward. That's called the inside view, and it feels rigorous because it's full of specifics. But specifics are exactly what make you overconfident. The outside view asks a duller, more useful question first: across all the cases roughly like this one, how did things usually turn out?

Anchor first, adjust second

The correct order matters more than people realize. Start with the base rate: what happened, on average, across many similar situations. Only then adjust, modestly, for what's genuinely different about your specific case. Most people skip straight to the adjustment and never establish the anchor, which means they're not really adjusting anything, they're just making up a number that matches how excited they already feel.

Say you're looking at a small company projecting 40 percent annual growth for the next decade. Before you get pulled into the specific story of why this one is different, it's worth asking: across all small companies that have projected sustained 40 percent growth, how many actually delivered it for ten straight years? The honest answer is very few. That's your anchor. Now you can ask what's genuinely unusual about this specific case that might justify sitting above that historical pattern, and the honest answer is usually: not much, or not enough.

Where the outside view gets ignored

This fails in practice because the inside view is simply more emotionally compelling. A great story about a specific founder and a specific market beats a dry statistic about how the average version of that story played out, every time, in terms of grabbing your attention. That's exactly why it's dangerous. The cases that feel most special are frequently the ones where people most needed the base rate and most successfully talked themselves out of using it.

• Ask "how does this general category usually turn out" before asking "why is this one different."
• Treat a compelling story as a reason for more scrutiny, not less.
• Adjust from the base rate in small steps. Large adjustments usually mean you've abandoned the anchor entirely.

This breaks down hardest with genuinely rare, category-breaking cases, where the base rate legitimately doesn't apply. The trouble is that almost every mediocre situation gets pitched to you as if it's one of those rare exceptions, so the discipline is refusing to grant that exception without real evidence.