Most economic theories make an assumption that humans are
rational, but this definition is a peculiarly drawn one as it
assumes that we all operate on the basis of Bayes’ Theorem, an
idea which is freely bandied about but which very few people can
actually describe. There’s a good reason for this – it’s
profoundly unintuitive, which makes you wonder if we do think
the way the theorem suggests we ought to. Unintuitive or not
every investor should have a working appreciation of the ideas
behind Bayesian reasoning, because it’s another one of those
mental models we can use to assess the usefulness, or otherwise,
of our ideas. And oddly enough, it may be even more fundamental
than we think. The original paper on Bayes Theorem was entitled
An Essay towards Solving a Problem in the Doctrine of Chances
and dates from 1763. It wasn't even published by the eponymous
Reverend Baynes but by his friend Richard Price, who discovered
it in his papers after his death. As we’d expect under Stigler's
Law of Eponymy it’s quite