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How Can You Boost Your Base Rate When Searching for Winning Funds?

Morningstar's Active/Passive Barometer is a novel way of measuring one's odds of picking a winner.

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In his book “Thinking, Fast and Slow,”[1] Nobel Prize-winning psychologist Daniel Kahneman discusses how he stumbled upon two different approaches to forecasting while working for Israel’s Ministry of Education to write a high school textbook on judgment and decision-making.

Kahneman and his longtime collaborator Amos Tversky ultimately branded these two schools of forecasting “the inside view” and “the outside view.” The inside view is deeply personal. In constructing a forecast based on the inside view, we focus very narrowly on our own unique experiences and situation and extrapolate from there. (For example, I’m an above-average driver with a squeaky-clean driving history about to go on a short trip in fair weather. The odds of me getting in a fender-bender are almost nil.)

Ben Johnson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.