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Innovation and the Base Rate

Suppose you're told that three out of four car accidents happen within 25 miles of your home. Are you safer driving away from home? Based on this statistic alone, most people would assume they are safer. But the picture changes when you consider an important part of this scenario called the base rate. In probability and statistics, the base rate is the underlying probability unconditioned by prior events. Failing to consider the base rate leads to wrong conclusions, known as the base-rate fallacy. In this example, the base rate is the total percentage of driving that happens within 25 miles of your home. Let's assume it is 90%. Given the odds of an accident are only 75% in an area you spend 90% of your time, driving close to home is clearly safer.

Why does this matter in innovation? Understanding the base rate with a product's performance can lead to hidden insights and opportunities. Look at this example, as reported by CNET:

"Where exactly do most people accidentally ruin their iPhone? If you guessed the toilet you'd be wrong, says a new survey. According to device warranty provider Squaretrade, most people — 21 percent to be precise — damaged their device in the kitchen. The runner up, at 18 percent, is the living room, followed by the bathroom at 16 percent."

Well that's fine, but now let's consider the base rate: how much total time do we spend using an iPhone in the kitchen versus other places? Assume people spend an average of 10% of their iPhone usage in the kitchen. Viewed this way, the rate of iPhone accidents in the kitchen seems high. We would have to conclude the kitchen is not a safe place to use a smartphone. At the other end, let's assume instead we spend 30% of our cellular calling time in the kitchen. In light of the base rate, the kitchen is actually a safe haven for iPhones.

For innovation practitioners, here is the point: when you see disparities between the point estimate and the base rate, you should ask why. Perhaps there is an opportunity to innovate a solution. If the iPhone is at risk in the kitchen, perhaps an innovation technique like Task Unification could help. Is there another component in the vicinity of the kitchen (The Closed World) that could be recruited to help reduce the risk of breakage? If so, you may have a nice commercial opportunity.

If the iPhone is safer in the kitchen, you should also ask why. Are there features, user habits, or design aspects that make it safer? Can they be generalized and embedded into other smartphones? Can they be used in other things like kitchen tools? Once again, you may have a nice commercial opportunity on your hands – thanks to the base rate.

The bottom line is that ignoring the base rate can lead to wrong judgments. Instead, take advantage of this often hidden gem. Peek into the base rate in any product scenario to see what possible opportunities lie within.

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