In one of my favourite books on investing, The Intelligent Investor, father of value investing Ben Graham makes a very important point right at the start.

He argues that an investor’s chief problem, and even his worst enemy, is likely to be himself.

So very true, isn’t it?

Remember, this was way before the whole behaviour finance revolution kicked off. It’s why you need to give Graham the credit for being so spot on with his observation.

Decades later, behaviour psychologists like Daniel Kahneman and Amos Tversky would undertake a full-fledged study of the biases that affect our thinking and often come in the way of sensible decision making.

And guess what? As far as investing is concerned, they came to the same conclusion as Graham.

One of their more famous works is known as ‘On the Psychology of Prediction’. They explain how humans are such bad predictors and what we can do to improve the accuracy of our predictions.

According to them, there are 3 things to consider to make an effective prediction:

• The base rate
• The individual case
• How to weigh the two

Let me help you with an example which, although silly, does its job quite well.

Imagine you are walking down a street and suddenly you encounter a dog. Should you be careful and quickly get out of its reach or should you keep walking, hoping that the dog won’t bark loudly at you?

Well, if you consider statistics then it is found that 60%-70% of all dogs bark aggressively at strangers.

Therefore, the dog in front of you is the individual case and your base rate is 60%-70%.

So, how are you going to weigh the two factors? 

Well, if it was me, I would steer clear of the dog. I would ensure I’m well outside the range of its leash. The odds that the dog won’t bark at me are not in my favour.

That’s the power of using a base rate right there. Even if it was a small dog, you’d be well advised to steer clear of it based on historical base rate.

Base rate is very useful in the field of investing as well.

The next time you are tempted to invest in a highly speculative small-cap company that has no profits currently but is likely to be profitable in the future, you need to ask yourself what is the base rate here? How many times have people ended up making huge money on such investments?

Well, if it is a low number and there’s very little that separates this company from a typical speculative stock of the same size, you’d do well to stay away from the stock.

Thus, an understanding of the base rate is such an important quality to have while investing in stocks. It not only helps us invest in stocks and asset classes with a greater reward potential than risk but also helps us steer clear of highly speculative counters.

Little wonder, Daniel Kahneman called base rates as one of his favourite concepts.

Conclusion

The market punishes prediction arrogance but rewards probability humility. Base‑rate thinking is simply a structured way of staying humble. Adopt it, and you’ll:

• Avoid most capital‑destroying fads.
• Enter high‑quality ideas at valuations that still leave upside on the table.
• Sleep better because your portfolio is built on odds, not anecdotes.

Try this for one earnings season: each time you feel that itch to buy or sell, pause and ask, “What does the base rate say?” Chances are, you’ll make fewer moves—but far better ones.

Ben Graham spotted this trap 80 years ago.

Kahneman quantified it 40 years ago.

But you can exploit it starting today.

If you’re looking for a ready‑made framework that bakes base rates, check out MultiplyRR’s research stack and see how a data‑first approach can stack the odds in your favour.

Invest smart, stay curious, and let the numbers keep you honest.

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