Skip to main content

How to Avoid Survivorship Bias in Finance and Trading: A One-Minute Guide

 



Survivorship Bias Explained in One Minute: From Definition/Meaning to Examples (Finance and Trading)

Survivorship bias is a cognitive error that makes us overestimate the chances of success by focusing only on the winners and ignoring the losers. It can lead to false conclusions and poor decisions in many areas of life, especially in finance and trading. Here are some examples of how survivorship bias can affect your financial decisions:

How can you avoid survivorship bias in your financial decisions? Here are some tips:

  • Look for the whole picture: Do not rely on selective or incomplete data that only shows the positive outcomes. Try to find out the negative outcomes as well and compare them with the positive ones. For example, if you want to invest in a mutual fund, look at its performance over a long period of time and compare it with other funds in the same category.
  • Consider the alternative scenarios: Do not assume that the successful outcomes are the only possible ones. Try to imagine what could have gone wrong or differently for the survivors. For example, if you want to follow a successful trader, think about how their trades could have turned out badly or how they could have made different decisions.
  • Test your assumptions: Do not take the success stories at face value. Try to verify the facts and logic behind them and see if they still hold up. For example, if you want to copy a successful strategy, test it on historical or simulated data and see how it performs under various scenarios.

Survivorship bias is a common and dangerous mistake that can distort your perception of reality and make you overconfident in your financial decisions. By being aware of it and applying the tips above, you can improve your financial literacy and avoid costly errors. Remember, the savvy wallet is not only about making money, but also about keeping it.


Comments

Post a Comment

Popular posts from this blog

How Social Media Impacts Your Finances: The Good, The Bad, and The Ugly

  The Economics of Social Media: How It Affects Your Wallet Social media platforms, such as Facebook, Twitter, Instagram, and TikTok, have become ubiquitous in the modern economy and fundamentally changed how people interact, communicate, and consume information. But what are the economic implications of social media for individuals, businesses, and society? How does social media affect your wallet, both positively and negatively? In this blog post, we will explore some of the main aspects of the economics of social media, based on the latest research and evidence. The Production of User-Generated Content One of the distinctive features of social media platforms is that they rely on user-generated content (UGC), which is any form of content, such as text, images, videos, or audio, that is created and shared by users. UGC is the main source of value for social media platforms, as it attracts and retains users, generates data, and enables targeted advertising. However, UGC also poses...
Post a Comment
Read more

Book Review: Atomic Habits: An Easy & Proven Way to Build Good Habits & Break Bad Ones by James Clear

  Atomic Habits by James Clear is an absolute game-changer for anyone looking to build good habits and break bad ones. This book has truly revolutionized the way I think about habits and how they impact our lives. Clear's writing is easy to follow and understand, and he provides practical and actionable steps to help you create the habits you want in your life. One of the things I loved most about this book was the emphasis on making small, incremental changes. Clear explains how small changes over time can lead to big results, and how even the smallest of habits can have a profound impact on our lives. This idea was incredibly empowering to me, as it means that anyone can make a change in their life, no matter how small it may seem. Another aspect of the book that I found incredibly helpful was Clear's focus on the systems and processes that drive our habits. By understanding the underlying systems and processes, we can more easily create new habits and break old ones. Clear p...
Post a Comment
Read more

How to Spot and Avoid Spoofing in Crypto: A Guide to Order Books and Market Manipulation

Order Books and Spoofing (Crypto’s “Spoofy”) Explained in One Minute: Definition, Legal Issues, etc. If you are a crypto trader, you may have heard of terms like order books and spoofing. But what do they mean and how do they affect the market? In this post, we will explain these concepts in one minute and help you understand the risks and opportunities they present. What Are Order Books? Order books are simply records of all the buy and sell orders that are placed on a crypto exchange for a specific asset. They show the price and quantity of each order, as well as the time and date they were placed. Order books are useful for traders because they provide information about the supply and demand of the market, as well as the liquidity and volatility of the asset. For example, if you want to buy Bitcoin, you can look at the order book and see how many sellers are willing to sell at different prices. You can also see how many buyers are competing with you for the same asset. This can help...
Post a Comment
Read more