Base Rates
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A couple from the US are talking right in front of you and they are so loud that it is impossible not to hear them. One of them is proposing that they sign a prenuptial agreement and the other is accusing the proposal of being in bad faith.
So what is it?
Do you think steady couples should get prenuptial agreements when they are thinking of marriage or should that be left for couples that don’t really see their relationship lasting for long?
Take a minute and think about it.
And while you do, here are some numbers from the American Psychological Association:
About 40 to 50 percent of married couples in the United States divorce. The divorce rate for subsequent marriages is even higher.
Do you still think prenuptial agreement is a bad idea?
When you’ve got a 50% chance of ending up in a divorce, is it not common sense to plan for the other equally likely scenario?
Base Rate? And Why Should You Care.
The “bad faith” argument in marriages is made based on a common cognitive bias called ignorance of the base rate.
A base rate is a type of probability that describes the likelihood of an event when no new or more specific information is available.
Taking the above situation, when no new information is available getting a prenuptial agreement is the rational thing to do.
(People also often just assume that the base rate doesn’t apply to them but this couldn’t be any further from the truth)
Let’s say we get some additional information that the couple are of Asian ethnicity.
This information will change the probability of divorce drastically. Less than 18 percent of Asian women and 16 percent of Asian men end up divorcing, so making a prenuptial agreement in this case might not be necessary but just something you do as a “good to have”.
So when you do not have new information, it is always better to make a calculated move based on the base rates. And when you do have more information, you can tweak your calculations accordingly.
Making Base Rates Work.
If you are going to be rational about your decision, taking base rates into account is critical.
Taking the above example, if you are from or marrying someone from a race/ethnicity that has high rates of divorce, you should ideally insist on a prenuptial agreement. To say that you are different or that your marriage is special is plain ignorance of statistics.
Same goes with career choices. If you are trying to become an actor, it is better to have a backup plan because most aspiring actors do not make it big. But you don’t really need a backup plan if you are trying to become a plumber.
Financial choices can also be made far more efficiently if you consider base rates. Most people will need health insurance in their lifetime to avoid financial ruin, so thinking that you will be one of the very few who will not need it is sheer ignorance.
Even in business when a competitor of yours has tried a strategy and failed, it is better for you to avoid that strategy unless you know something significant than your competitor didn’t. Otherwise with no new information, you are better off avoiding it.
So that is it about base rates. The topic is quite extensive and there could be a lot more said about it, so if you are interested let me know and I’ll do a part 2.
What are your thoughts? Let me know by replying to this email.
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