Survivorship Bias
Hey team. After a couple of really busy weeks, things will quiet down a bit on the economic front next week, starting with a long weekend.
The financial markets are an area where people are particularly vulnerable to being misled. Today’s article explores survivorship bias and its impact on the markets.
Impact Snapshot
Presidents Day: Stocks Closed - Monday
President Trump Speaks - Tuesday
FED FOMC Minutes - Wednesday
Unemployment Claims - Thursday
Manufacturing PMI - Friday
Consumer Sentiment - Friday
Macro Viewpoint
The S&P 500 index gained 1.5% this week, driven by stronger-than-expected quarterly earnings.
Market volatility was primarily influenced by headlines from Washington and ongoing tariff concerns. However, as has been the trend, any pullbacks remained brief and relatively shallow.
Inflation data came in slightly above expectations. The seasonally adjusted U.S. Consumer Price Index rose 0.5% in January, exceeding the anticipated 0.3% increase. Similarly, the Producer Price Index saw a 0.4% rise, also surpassing expectations of 0.3%.
Market participants will be paying attention to commentary from Federal Reserve officials. Additionally, the Federal Open Market Committee (FOMC) minutes are set to be released on Wednesday.
“Trust me, it works”
The following article is built upon our Friday’s market brief, as “Survivorship Bias” is an overlooked topic that many new traders don’t understand, and it often becomes too late when they realize how markets actually work. (Book recommendation - Fooled by randomness.)
Consider this scenario:
John is a 22 year old and he has already amassed a fortune of 3 million dollars. Are you impressed by John?
One might be, until you realise how he got his fortune. He got it through playing Russian Roulette with the Mafia on three occasions. Each wager was for 1 million dollars.
Sure, he might be the lucky owner of 3 million dollars today, but in 42% of other possible realities, he died before his 23rd birthday!
Now of course, this is not a problem – John may do whatever he likes with his life!
Problems start to arise when John explains to other young people how they can easily gain 3 million dollars in their early 20s—just by playing some Russian Roulette!
It’s not as dangerous as it seems. The trick is to blink three times as hard as you can and then make a clap, before pulling the trigger. Trust me. It’s “bulletproof”. - John
This is a clear case of survivorship bias.
Youth all over the world may admire John for his Russian Roulette skills and try his strategy in the game themselves thinking that it’s “bulletproof”.
Trading strategies and much of what you read online can be very similar to the example above. Just because something works for someone doesn’t mean it will work for you as well.
You look at successful traders and assume their methods are effective, overlooking the many who failed using the same strategies and methodology.
The above quote is arguably the most important you’ll ever hear regarding the path to success in trading.
Most of your favorite influencers don’t even know what bid/ask is or how orders are matched. Their “easy” strategy may have worked for them, but what about the thousands who tried their so-called “direct” path to success?
You have to define your own edge, and that will require building a solid market understanding along with self-understanding.
The scope of this Substack is to help you work on your market analytical skills, so no matter what strategy you use, you trade with the odds rather than against them.
Develop better context and create a robust entry model by understanding all the market nuances we share on a daily basis. This will help you build the market understanding that most traders lack.