Definition of base rate

The term "base rate" refers to the prior probability or initial guess of a decision maker or reasoning agent in situations where multiple alternatives are presented. It is often referred to as the background or starting rate and is used as a starting point in the calculation of conditional probabilities. The concept of base rate is essential in Bayesian statistics, which is a statistical framework that updates beliefs or judgments when new information becomes available. Bayesian statistical inference relies on the Bayes' theorem, which is based on the product of the prior probabilities and the likelihood ratios. By incorporating the prior probability, known as the base rate, Bayesian inference can make more accurate predictions than traditional methods like frequentist statistics, which solely rely on empirical data. In decision theory, especially in fields such as economics, finance, and law, the base rate represents the probability of an outcome occurring before any other information is considered. It is an essential factor in determining the overall likelihood of an event and is particularly critical when dealing with rare events, which have low probability values. In summary, the term "base rate" refers to the initial or prior probability of an event or alternative, used as a starting point in updating probabilities as new information becomes available. It is critical in Bayesian statistics and decision theory, where it is used to facilitate more accurate predictions and decision-making under uncertainty.