Prime rates for forecasting and decision making
To see the future, you must first see the past. This is the idea of the “prime rate. Prime rates are the hallmark of good forecasting and decision-making, with the most accurate forecasters using them more often than less accurate colleagues.
Prime rates are simply the frequency with which a certain outcome occurs in similar situations. If 1% of people were software engineers in years past, the prime rate (of a random person who is a software engineer) is simply 1%.
While the above may seem obvious, people tend not to consider the prime rate when thinking about the future or making decisions.
Let’s say we’re trying to determine whether Democrats will still have a majority in the House of Representatives after the next election. On average over the past 50 years, Democrats have held about 240 seats in the House — that’s one prime rate. But the 2022 election is a midterm election when the majority party has the White House, and we have a well-established prime rate that the party that controls the White House usually loses seats in midterms.
You can narrow it down even further and look at the number of seats held by the incumbent party in the interim when the president’s approval rating is below, say, 50%. The key here is to identify similar situations in the past and look at them as baseline expectations of what will happen in the future.
And that’s really all there is to know about prime rates at the most basic level. To use prime rates yourself, try the checklist below:
How to use prime rate, checklist:
- Identify which situations from the past are similar to the situation you want to better understand or predict.
- Identify relevant statistics from those similar situations.
- Think about which prime rates are most informative and most appropriate for the situation you encountered, and weigh them higher than the other prime rates.
- Combine the simple bets you found into a total probability. For example, if you have two simple bets, one of which is 25% and the other 10%, you would average them to 17.5%. But by doing step 3, you may find that the first bet is more similar and informative, so you can give it more weight (for example, by increasing the 17.5% to 20%).
- In your final prediction, apply the prime rates you found and combined. This is the most important step, because it’s surprisingly easy to do all the work of determining good prime rates and yet forget to apply them when needed.
Proper use of prime rates improves prediction, but most importantly, it improves decision making
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