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Is your friend really photogenic?
Music, selfies, and investing
Are you tired of that one friend who always seems to have the perfect pictures? All her/his uploads on the internet seem gorgeous. Chances are that friend is not as perfect as the internet says. He/She may just be spending a lot of time taking photos and one of them is bound to make the cut. As you may have guessed you only see what made the cut and hence come to the conclusion that he/she is very photogenic.
Survivorship bias is a common logical error that occurs when we assume that success tells us the whole story. We fail to account for failures, often due to their lack of visibility. We use the success stories as an example of “all the stories” and come to the wrong conclusions
“Music these days is horrible. They don’t make it like they used to!” is a common complaint. This unfortunately is not a fair comparison as we go on to compare new bad songs with the best creations of the past that turned into classics and survived through the decades. Clearly not a fair comparison as we do not remember all the bad songs from history because they were terrible. We are comparing apples to rotten apples and that right there is another instance of survivorship bias!
In the financial markets, we often make decisions on published fund data. Unfortunately, this published fund data does not factor in the funds which have gone bust. This skews the data and hence our decision-making. Furthermore, a common idea in investing is to see how a particular strategy would have performed in the past. If it performed well in the past It may actually make sense to try it in the future. While trying to calculate how a strategy would perform in the past we may end up using the current stock market participants. This is problematic as the current stock market participants are void of companies that failed and hence do not belong anymore to the stock market world.
For more on Survivorship bias, you can refer to this article!