Base Rate Fallacy (statistics)
Also known as Base Rate Neglect, Base Rate Bias, …
in scientific contexts.
It occurs in a wide range of other context where it is used — intentionally and not —
as a deceptive/persuasive tactic.
- Public Health/Medical domain:
One widely used teaching scenario has a rare disease that is 100% fatal if untreated,
but that has a treatment that is 100% effective,
but with a significant risk of killing the patient.
There is a test that is 99% accurate in identifying who has the disease.
Question: Are the risks/benefits worth it?
I have created a spreadsheet of such a scenario that allows you to see how good/bad your guess was
and then to experiment with the parameters to get intuitions about how much they affect results.
This also highlights the importance of not neglecting any of categories of true and false positives and negatives.
- Credit cards Fraud domain: Issues
- False negatives: accepting fraudulent transactions:
- Costly for the CC bank if they can't charge back to the vendor.
- If they deny that it was fraudulent and bill the customer,
the customer may cancel the card:
The cost of replacing the income from a lost customer can be substantially higher
that the value of the fraudulent transaction.
- False positives: denying legitimate transaction.
More than just the loss of the service fee on that one transaction.
Consider someone who has taken extended family or business group to expensive dinner
and the waiter tells him in front of everyone that his credit card has been refused
(which is all the restaurant has been told).
- Potential loss of that customer. He feels humiliated and isn't going to let that happen again. Paying with another card does not show that he hasn't mismanaged his finances on that card.
- Customer is unlikely to take his humiliation silently,
and his negative remarks about the CC bank to his network of family, friends, associates, …
may predispose them to against that CC bank.
- The decisions are not Legit-Fraud, but are very sensitive to the amount.
There are (lower) thresholds where the transaction is automatically approved
— back in the 1990s, it reportedly bounced around $25 —
because the cost of the fraud itself wasn't worth the costs of false positives.
- Total Information/Terrorism Awareness:
In the aftermath of the 9/11 terrorist attack,
there were may advocates claiming that intensive surveillance to detect and prevent terrorist attacks.
A wide-range of Computer Scientists attempted to point out the fundamental flaws
in those claims,
not having absorbed the lessons of the 1967 movie The Producers
that started with the realization that failure could be immensely more profitable than
success.
The flaw related to the Base Rate Fallacy was explained in a widely circulated email
from Professor Benjamin Kuipers
with this copy forwarded by an extremely eminent and well-connected pioneer of Computer Science:
'Total Information Awareness' as a diagnosis problem (2002-12-14 email by Professor Benjamin Kuipers, Computer Sciences Department, University of Texas at Ausin (later of The University of Michigan).
Note:
A significant weakness of this email was that many in the target audience
were unaware-of/ignored the potential for explosive growth of insurgent/guerilla/terrorist/…
groups, especially of false posititives and collateral damage
.
Illustrations:
- In WW2 in Yugoslavia, the (vicious) Nazi repression was recruitment for the guerillas.
Was this not part of the education of the generals in the Pentagon?
- Subsequently, drone strikes were heavily favored by the Obama administration
because there was negligible immediate risk of US casualties.
They would kill a suspected terrorist at a crowded cafe, at a wedding,
walking down a crowded street, …
with tens of innocents killed and many more maimed.
It never seemed to register that a man whose wife and children had been killed
for
being in the wrong place
would just say Oh, well. That's life.
Or the family, the friends, the larger community.
That out of that accumulation, there would be some who would seek revenge on the US
and Americans.
- Predictive Policing: Cultural touchstone: 2002 Tom Cruise movie Minority Report in which the false positive rate being ignored was a key plot element.