Base Rate Neglect

If 90% of trading strategies fail to produce positive returns after costs, and a particular strategy passes a backtest, has a clean Sharpe ratio, and looks compelling on paper — what is the probability it will succeed? Base rate neglect causes people to focus on the specific evidence (the backtest looks good) and ignore the base rate (most strategies fail). The backtest would need to be extraordinarily discriminating to overcome a 90% base failure rate.

Kahneman and Tversky documented base rate neglect as one of the most persistent cognitive biases. Presented with general statistical information and specific case details, people overwhelmingly weight the case details — even when the base rate is far more informative.

This matters at every stage of using botwir3. When selecting a strategy: most strategies do not have durable edge, so the default assumption for any new strategy is skepticism. When evaluating a backtest: most strategies that backtest well do not perform well live, so the default assumption for any strong backtest is suspicion of overfitting. When browsing the marketplace: most strategies for sale have exhausted their edge or never had it, so the default assumption for any listing is caution. This is not cynicism. It is calibration. The user who starts from a realistic base rate and demands extraordinary evidence to revise it upward will make better decisions than the user who starts from optimism.