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Survivourship bias and Beginners Luck

Updated: Sep 9, 2021

Why you should visit cemeteries: Survivourship bias

Georg Soros, Larry Williams, Carolyn Boroden, we all want to be the trader who's written a book or is famous for being super rich. But let’s consider; what's the number of traders who fail? How many have come before us to not succeed or quit?

Let’s have a look at some of those stats: 70% of traders blow their account in the first 3 months of trading, after 1 year this rises to 85%.

We tend to succumb to the illusion of success and we mistake how small the probability really is. If you have lasted more than 3 months, then you start to exist in a high percentile - appreciate that. If you still have your account after a year then your are in an even smaller group. And, one step further, if you are profitable for a year or more then you are in a very niche group of <1%.

Survivourship bias is where there's a lack of consideration of who survives and who's out over time. For example, in a stock index when back testing the current stocks that exist in that index today may not have existed in the index 5 years ago. Therefore the reporting on stocks that have fallen out of the index is not telling the whole story, hence why there is an upward bias to stock indices.

Similarly, the reporting on the reality on survivours in trading is commonly unknown. We tend to only focus on the highly dramatic event of success and failure.

beginners luck

Sometimes when a new trader embarks on this journey the association of some "wins under their belt" can become what we know as Beginners Luck. This is the false belief their performance is above average or they instantly have the experience to be consistent. The trader may have a bout of hubris and increase their stake, change markets or even their strategy altogether.

Unfortunately the reality of Beginners Luck can bite hard.

There is always a spike in data distribution at the start of any analysis. Only when the probabilities normalise is when the truth comes out. Take this distribution of several trials on a coin flip. Only after many trails or events is when the true probability is known. Unfortunately, most traders are completely ignorant of their true probability due to, and certainly not limited to, an insufficient number of trades in their trial.

As a prop firm it is prudent that we test for the traders true ability and therefore we don't rush through selection process. Time always tells whether a trader is ready for funding.

Have you heard of the Dunning-Kruger effect? - An excellent representation of the journey a trader goes through. So don't be fooled, trading is a marathon not a sprint. All of our traders are stable and consistent and unfortunately to get there we have to endure the path described below.

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