Randomness and survivorship Bias

Think of a situation where you get an email on the First of Jan saying that the markets are going to up this month and they actually go up in the month. Again on the first of next month you receive a mail saying that this month the markets are going to go down and BINGO you notice they go down. This happens consecutively for 6 months, with a right prediction every time.

Your Analysis is that the person sending you the mail must be a top notch analyst who has figured the movements of the market well. On the next month again you receive a mail saying that the markets are going to go up substantially up this month and also with an accompanying brochure of advertisement to invest a small sum of US$ 100 in his fund so that you can benefit from his analysis. You are tempted to do so and you do so.

The person was a con and he loots you of the money.

How did it all happen? Why would an analyst of repute do that?

The story behind all this is that a mathematician sent out an email the first month of Jan to 64 people, in which for 32 he wrote that the markets are going to go up and for 32 to that the markets are going to go down. Depending on how the markets behaved that month and to the set of people he was right he divided the set into two and to one group he sent the email the markets are going up and to the other the markets are going down. At the end of the six months he had given right set of signals for 6 consecutive months to one person whom he sent out the promotional material.

So actually you were just a victim of survivorship as you were the person who survived the random attempts of the mathematician.

We are very observant of success around us and gladly dissect the past of successful person and find a trend in terms of personal qualities, hard work and honesty. What we miss out is the thousands and millions of who had similar qualities and who set out in similar ventures of the likes of Narayan Murthy, Bill Gates, Warren Buffet, Dhirubhai Ambani etc. One probable reason is only successful people right biographies and the history remembers only those who lived or were successful.

“Heroes are Heroes because their actions are Heroic in Nature, not because they won or lost.

{Thoughts adapted from Fooled by Randomness by Taleb}


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