Survivorship bias and Trading
I know you are also unaware of the term survivorship bias and right now scratching your head or googling it. Here’s a Wikipedia link to get information on the Survivorship Bias.
Survivorship bias is the logical mistake we make while thinking or decision-making process about something. We ignore certain facts and fail to think on the opposite side. Which might impact your decisions and outcomes.
Let me explain by some examples.
Startups: Nowadays everyone is thinking about starting a new startup, Including you 😀 . Why? Because startups make you rich in a big way. You can be master of your own destiny and enjoy a lavish life.
Wonderful isn’t it?
You are super wrong. According to the survey done by IBM in collaboration with Oxford University, Only 10% of Startups survive till the age of initial 5 years. God knows how many survive in the long run.
So, If the majority of Startups fail then why we are still thinking of taking risks?
Because the media and the Internet say so. They paint a rosy picture and show interviews of successful start-ups. They show success stories of individuals who seek after their fantasies and beats the chances. you feel so damn motivated after you see an interview with a smart young man, way younger than you, earning in millions. Books and the Internet are filled with articles on how to become a millionaire or how to start your startup?
Nobody talks about the remaining 90%. Everyone feels taboo talking about those. The astounding numbers of failures are not visible to the individuals, and only those who succeed are shown regularly.
The Misbelief: You should follow the successful people and their habits if you want to become successful like them.
The Truth: When disappointment ends up noticeably undetectable, the contrast amongst disappointment and achievement may likewise wind up unnoticeable.
You must have heard about the Fake Tips provider’s scam.
You receive Buy- Sell SMS on your mobile phones and sometimes you think who the hell trades those fake messages. Let’s see who trades.
The Operator sends out BUY CALL on XYZ stock to 50 people and simultaneously sends a SELL CALL on the same stock to another 50 people. The stock either falls or rise. Let’s assume stock rise and 50 people who received buy call are impressed. Operator deletes rest 50 people numbers from his SMS list.
Now, he again Smses both BUY AND SELL CALL on the XYZ stock to 25-25 people. Again 25 people got it right and other’s numbers were deleted. Again the same process, this time 12-13 people were selected. 12 people got it right and 13 were removed. And so on. 6 people remain in the last. Those 6 peoples think that the operator provides very good calls and has 100% success rate as claimed by him. They have seen his past calls and subscribe to his paid service. They fell victim to the Survivorship Bias.
Survivorship Bias with respect to Trading
Nifty: Every time I open news channels, They are quoting nifty making new highs. Every broker and agent are showing statistics of Nifty’s annual returns. If someone impressed by these statistics would have bought a Nifty stock. Would he have gained the same return?
If he had bought Wipro, then Yes. But what about those who bought Suzlon and RPower when they were in Nifty.
NSE periodically kicks out nonperforming stocks from Nifty 50 and keeps on adding the good movement stocks. Doesn’t this create a bias? I cannot simply Co-relate my stock investments future movement with the Nifty 50’s future predictions. Think about it.
Trading Strategy: While designing a Trading strategy we might get carried away by false data and forget to think all the parameters required for a successful system and a good trading plan. It is equally important to learn from failures and mistakes as well.
Full-time Trading: My friend told me that he has been in a company of few guys in a trading group and most of them Trade professionally and are from same Software engineering background. He only saw one side of the coin and forget to think about the other half. His company of successful traders made him believe that he can also do it. Rest thrust was given by motivational youtube videos and books.
Sometimes Luck favors the successful people too and we fail to admit that. It is not at all compulsory that if you study under the street light like Abdul Kalam, then you will become like him.
I will close the topic here and let your ride your Thinking horses now. Let me know of any more examples you can think of in comments section.