I opened YouTube this morning. Time for some inspiration and to learn about personal finance. Yet, the algorithm is convinced I want to learn how much X was paid for 1 million views. They’ll of course share a few tips on how they attained this amazing amount of revenue.
The only problem is all we see are the successes… we are constantly put in front of successful creators, investors, and entrepreneurs. It makes us believe it’s accessible. The issue here is the sample size. We forget to look at the overwhelming amount of failures. Survivorship bias is in action!
Let’s dive into what survivorship bias is and how it influences choices.
What is survivorship bias?
When researching the feasibility of an opportunity, I start with the tip of the iceberg – success. What would it mean if I became a successful investor or chef? It’s a natural instinct, we look for the best-case scenario. We fantasize about how better our life would be in X scenario. Completely neglecting those that failed.
When only focusing on top performers and statistical outliers- we become victims of survivorship bias. As conclusions are drawn, based on overwhelmingly positive examples the idea of failure becomes abstract. It’s the reason we constantly hear about unicorn startups and successful traders. Without, giving space or a voice to those that gave up along the way.
An amazing example is Jeanne Calment (1875-1997), the human to live to longest, she ate over 2 pounds of chocolate on a weekly basis (almost 1kg). Madame Calment also credited her longevity to her diet. Yet, it would be preposterous to expect that eating 1 kg of chocolate a week would ensure you live till 120.
As soon as you understand survivorship bias it becomes easy to spot. From the lottery winner to the millionaire day trader. Yet you never see the thousands that lose every week playing the lottery or the traders that gave up along the way. I dive into the broader issue of comparison in my article “Comparing Yourself To Others Is Expensive”.
When you decide to undertake a new endeavour ask yourself where your new-found love comes from. Are you starting a blog or YouTube channel to make money or as a passion?
To create a successful creative venture or company, drive must come from elsewhere. Success and riches cannot be the sole driver of any endeavor. Or we risk going up in flames. Success whether financial or personal is often built on failures.
The problem is we idolize successful outliers from dropping out of college to quitting your job with no plan. They are invited to talk at seminars and give presentations in companies. They write books on their story.
This leads us to think “If he can do it, so can I!”. It can’t be that difficult, can it? Every year we read interviews from those that beat the odds. The one in a million genius entrepreneur. That’s the thing, isn’t it… They are 1 in 1,000,000. Why would emulating their lifestyle make me any more likely to be the 0.0000001%?
Beating the odds takes an unimaginable amount of risk and has a small chance of success. If we were all capable to win the jackpot there would be no appeal. Don’t get me wrong… drawing inspiration from the Elon Musks of the world is normal. The problem comes when we convince ourselves that we can be as successful. Whereas, in reality, 57% of startups from 2013 were gone 5 years later.
How to survive the bias?
The first lesson is an obvious one. Making a decision based on an inspirational tweet or video is a terrible idea. Blindly following financial gurus or simply legit investors can lead to making impulse decisions based on perception. Taking a step back to understand our own biases is key. Yet it’s easier said than done, isn’t it?
My favourite serial-entrepreneur, Richard Branson has shown that it takes failure to find success. Who doesn’t remember the terrible Virgin Cola… All aspiring entrepreneurs have looked at multi-millionaires that bet their last dollar or dropped out.
On the other hand, they rarely look at the number of failures. Worse yet, it’s almost impossible to hear from true failures. Google “Failed Entrepreneur”, you will see that quickly you hear about JK Rowling or Oprah. We forget about those that never found mainstream success.
When getting started I take the time to look into the statistics and trends of the market. Go further than the headlines. This is especially true when it comes to trading. Once mass media reports a great investment that has 10x. It’s probably too late. It’s ok to miss the wagon don’t beat yourself up. Risking everything without in-depth research is lunacy.
As explained in my article, “Why I invest but Don’t Trade”, the reason I’ve decided to put most of my portfolio in index funds is security. Based on historical data the S&P 500 has returned 9.1% over the last 30 years. On the other hand, most day traders lose money within 300 days of trading. Yet, all we see are the successful traders flouting their wealth online. Effective investing is boring… learn more about it here.
Do your research
Whether it’s investments or health tips… take the time to research. We aren’t owed success. The achievements of a human must not set your expectations. Taking the time to understand average is great and knowledge lets you grow. Life is all about calculated risks and understanding most parameters.
There is nothing wrong with becoming an entrepreneur – it’s simply crucial to understand the risks.