From decentralized finance to NFTs and the metaverse, crypto continues to drive innovation.
It is therefore easy to believe every new project will succeed and grow exponentially.
However, this line of thought disregards a crucial bit of information: how many new tech projects have failed in the past?
You consider the individual merits of crypto projects but do not consider the merits of the overall asset class and in doing so fall victim to the base rate fallacy - your frequent failure to account for the base or original probability of a specific event occurring.
Consider the current NFT trend.
You may look at an individual project and think “these NFTs look great, they have a compelling narrative so this project will succeed”.
However, you do not account for the fact that most NFTs are not profitable.
Additionally, you do not account for the fact that most NFT traders are not profitable.
By failing to consider these base rates, you think your chances of success are significantly higher than in reality and increase the probability of making a poor investment decision.
So how can you avoid falling for this fallacy?
Our favorite is to follow Charlie Munger's two steps process.
1️⃣ Actively seek to understand all factors that govern the interests involved. Your failure to consider base rates occurs because your brains skip over such factors automatically. Seeking to understand all relevant components of a matter broadens your scope to include base probabilities.
2️⃣ Understand what biases may be leading you astray. Sometimes your mind hides base rates from you through cognitive errors such as survivorship bias. Seek to continually improve your self-awareness and you will learn to identify where your thinking process can be improved.
The base rate fallacy can lead you to dramatically overestimate the likelihood of any given event and can therefore lead to making poor investment decisions.
Deliberately seek all factors that are relevant in understanding any given matter, continually improve your self-awareness and you will be able to understand the true chance of success.
