Survivor bias stock market

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Please update to a modern browser to view this page. We use cookies to provide you with a better onsite experience. By continuing to browse the site you are agreeing to our use of cookies in accordance with our Cookie Policy. When I purchased my latest vehicle, I was astonished to get the license plate 6NWL What are the chances that I would get that particular configuration?

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Before I received it, the odds were one in ,, The number of letters in the alphabet to the power of the number of letters on the plate times the number of digits from 1 to 10 to the power of the number of digits on the plate: After the fact, however, the probability is one.

Smith illustrates the effect with a playing card hand of three of clubs, eight of clubs, eight of diamonds, queen of hearts and ace of spades. The conclusion seems obvious once you think about it, but most of us are regularly fooled by the survivor bias. Consider the plethora of business books readily available in airport bookstalls that feature the most successful companies.

Smith analyzes two of the best sellers in the genre. In his book Good to Great more than three million copies sold , Jim Collins culled 11 companies out of 1, whose stock beat the market average over a year time span and then searched for shared characteristics among them that he believed accounted for their success. These criteria must be applied in an objective way, without peeking at how the companies did over the next forty years. It is not fair or meaningful to predict which companies will do well after looking at which companies did well!

Those are not predictions, just history. Since then, Smith points out, of the 35 companies with publicly traded stocks, 20 have done worse than the market average. The survivor bias was evident in the reception of Walter Isaacson's best-selling biography of Steve Jobs, as readers scrambled to understand what made the mercurial genius so successful. Want to be the next Steve Jobs and create the next Apple Computer?

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Drop out of college and start a business with your buddies in the garage of your parents' home. How many people have followed the Jobs model and failed? No one writes books about them and their unsuccessful companies.

But venture capitalists VCs have data on the probability of a garage start-up becoming the Next Big Thing, and here the survivor bias is of a different sort. David Cowan of Bessemer Venture Partners in Menlo Park, Calif. If their garage is situated in Silicon Valley, they might get to pitch as many as 15 VCs, but VCs hear pitches for every one we fund, so perhaps 1 in 13 start-ups get VC, and still they face long odds from there.

So for every wealthy start-up founder, there are other entrepreneurs who end up with only a cluttered garage. Michael Shermer is publisher of Skeptic magazine www. His next book is Heavens on Earth. Login Not yet registered? By Michael Shermer on September 1, 8.

Michael Shermer Michael Shermer is publisher of Skeptic magazine www. Nick Higgins Recent Articles No, There Wasn't an Advanced Civilization 12, Years Ago We've Known for Years That Torture Doesn't Work What Would It Take to Prove the Resurrection?

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