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Survivor Bias - Following the Enthralling and Unrealistic

Survivor Bias - Following the Enthralling and Unrealistic

John Kicklighter, Chief Strategist

Talking Points:

  • Survivor bias is a cognitive bias whereby only those candidates or outcomes that are successful earn attention
  • This prejudice paired with a preference for entertainment leads to a focus on extreme trades and traders
  • Coverage of 'a-million-in-one' (luck) or focus on outcome with little reference to preparation skews expectations

Want to learn how to become a better trader? Join Paul Robinson for his Thursday webinar discussing different topics on how to improve as a trader. Sign up for the next one on the DailyFX Webinar page.

It was Winston Churchill who said 'history is written by the victor.' So it is - to some extent - with the markets. The legends and stories we hear on a regular basis are mostly those that have done exceptionally well. The circumstances of their success boiled down to its most entertaining parts. That makes sense when we consider what draws peoples' attention in mass to a subject that the average person would otherwise ignore. Yet, there is a serious detriment to the average trader when our understanding of markets and their navigation is based on a filter category of highly unusual people and events. It seems to be the standard reality that exceptional success is easy and common place, when in fact it is unusual and requires considerable preparation.

Expectations for market performance is set by a filtering process that naturally draws peoples' attention to the extreme. Financial journalism naturally calls attention to those traders who filter to the top or the exceptional trade and performance that bests all others. Yet, while this is good for entertainment, it is detrimental to preparing traders for the task of creating a viable strategy and establishing a resiliency to the inevitability of periods of underperforming. The person drawn to the remarkable headlines of a single trade that netted a fund or individual billions does warps the realities for those new or looking for a benchmark. When we set our performance against trades like those that rode gold to its extraordinary rally through 2011's highs or shorted the subprime market during the Great Financial Crisis or went like equities in March 2009 and have held since; we are lack appreciation for the role that luck (market conditions) play and miss the considerable preparation that goes into such strategy.

We cannot 'know' what the outcome the market is set to delivery - much less have fore-knowledge of the truly exceptional moves. The best we can do is be prepared to act when there is enough evidence that such a development is taking place. The trades that make the headlines have seen luck meet preparation, but all we are left with is the feeling that luck is the functional aspect of the effort. Furthermore, those hallowed names of trading are championed for their successes when there is considerable resources and research - not to mention false starts - that goes into readying for true opportunities. What we learn from such events and outfits is impractical. In contrast, the consistent and more moderate return traders can teach us practical skills and strategy that we can in turn reasonable replicate. Arguably the most valuable lessons are learned from those trades that do not work. We can identify what went wrong and see what could have been done - barring the incalculable outcomes of the market - we can do in order to better prevent such shortfalls in the future. We discuss the influence of the survivor bias on expectations in trading in today's Strategy Video.

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