(upbeat music) - When I think about base rates, it reminds me of kind of the whole premise of thinking in bets, which is that, you know, and it really brought to life the idea of asking someone to want to bet, right? Like the fact that we think of these beliefs, we have these ideas that we think are so certain and we're so confident, I'm gonna hire someone, they're gonna be the best, is really just thinking about everything in life as a bet and challenging yourself to put certainties around things, even mundane, silly decisions, kind of the best way to rewire how this all works in your head?

- Oh, I think so, absolutely. So here's the thing, when I say, do you want to bet? All I'm doing is making you examine the assumptions that are going into your statement. - Yeah, one for my wife and I is always just like, remembering something. I'm like, oh, I'm totally sure that our daughter's preschool is starting next week.

And like- - Right, do you want to bet? - My wife didn't ask that, but if she had, I would have been, oh, you know, like I don't know if I want to put all my money on the line. - Right, because what it makes you think about is like, there's a couple of things.

Well, what does the person who's betting me know that I don't know? So in some sense, when I say want to bet, I'm acting a little bit as a coach to you. 'Cause I'm telling you that I have a perspective that is different from yours. If I'm willing to bet, that means that I'm saying that I believe something different than you.

Okay, so it's automatically making you start to think like, well, what's a different way to look at this, right? And then you have to start examining like, well, exactly how sure am I of this? Like, so this is, you know, my husband and I talk like this all the time, right?

Where generally where it is, it's like, well, what's the price? That's what we ended up doing, which is just a way to say what's the probability, right? So we don't think about bets as just like dollar for dollar. Like he might say that, you know, he's, let's say that it's an election, right?

And you say, I live in Pennsylvania. So let's say you say like, I'm sure John Fetterman's gonna win the election and someone says want to bet. They might, you could say, you could immediately say yes, but then the response would be, well, what's the price? What are you willing to, are you willing to lay me a price?

Are you giving me a price? So in other words, like as an example, if I say to you, I'll bet $10 for every dollar that you bet, I'm telling you that I'm very certain that I'm right. 'Cause I'm risking a lot compared to what I can win. But if I say, no, no, no, no, no, right?

So the implied thing is like, if I say I'm 90% sure of something, I should be willing to lay you nine to one, $9 for every one, right? But as soon as I'm like, what? When you say, okay, I'll take the nine to one and I go, wait, no, no, no, no, no, like even money.

Then what I'm saying actually is actually, I think it's 50/50 and I was, you know, I wasn't really thinking about it. So it's like a good way to kind of be like interacting. And I can tell you that I do this with little things and big things and whatever.

It's actually kind of fun once you start like, well, what price do you want to lay? And we always bet a dollar, it's really fun. So, but I think that the thing that's really important about the betting and this is really, this is so crucial to good decision-making is that it forces you to make the things that are implicit in the decision you're making explicit.

Okay, so as an example, the simplest example is one of the things that is always implicit in the decision you're making is your forecast of the probability of different things occurring. In other words, whether you know it or not, base rates are part of the decision-making. So when I say to you, I'm gonna meet you for dinner at seven o'clock and I promise I'll be on time.

And you say, wanna bet? Implied in that is that I must have a tendency to be late. And the question is how much of a tendency do I have to be late? And how willing am I to say to you, yes, I'll bet you that I'm gonna be on time, right?

So when I say things like that and then you bet back, those are all things that have to do with base rates, right? You could say something like, I know the stock market is gonna go up this year. Well, that's a prediction of the future. And if I know the base rates, I may bet you on that, depending on what you're willing to lay me, right?

'Cause the stock market goes up actually somewhere between like, it depends on how you measure it, 65 and 75% of the years, it will go up. So if you say I'm a hundred percent sure it's gonna go up this year, I might bet you. Because now what I'm doing- - I would take that bet because there are actually options out there I could use to arbitrage your confidence.

- That is true, that is very true. But I'm not involved in the arbitrage. So you can hedge away, I'm just gonna take my bet. And then maybe I'll hedge it as well. But the point being that, when somebody says wanna bet, it's like, when you say, I think this person I'm gonna hire is gonna work out 90% of the time and I bet you, it makes you actually go through and start thinking, well, wait a minute, why do I believe that?

Remember one of the things that we wanna do in order to improve decision-making is to start thinking about what's the quality of the beliefs that we have that go into any decision that we're making. And part of that is making the implicit explicit. And this is one of the things that's so incredibly important.

I mean, even talking about a hiring example where like you send out to a bunch of people like, what do you think the job description should be? What do you think the person, if you were describing them to a recruiter, what, and you're getting that all independently, right? What you're finding out is in an explicit way, when they would otherwise just go and interview somebody, what are the things that they think are important for filling this role?

And now you've made that explicit in a way that you can, first of all, examine it, which is incredibly important, right? We have to be able to examine our decisions. And that means that we have to actually make all this stuff that's sort of in our gut explicit in a way where you can examine it like an object.

You can walk around it, you can have discussions about it. You can, I can see that you have a different perspective. And when we see that we have a dispersion of opinion, we can sort of dive into that dispersion to see where the gaps are, to see why you believe something different about the world than I do.

And this is the way that we start to learn really fast. It's the way that we start to get our decisions to be much more accurate.