By Vy Hoang on The Capital
“Beware of advice from the successful- Barnaby James”
Anytime we heard about a successful story, we let our minds wander in the illusion of achieving the same success. Stories of successful traders are everywhere on YouTube with promising strategies that can make you a successful trader too. There are countless of them. And they are successful in making a lot of money and living a lavish lifestyle.
Motivated by these stories and the ambition of earning money, you quit your 6 to 9 boring job and start being a full-time trader. You keep telling yourself that you will double your money in one year or turning 10k capital into 20k.
Will you make a great amount of money? It is not impossible but is it likely to happen? Or like many others, she will end up buried in the graveyard of failed traders? Only 5% of traders can make money, the graveyard of failed traders resides much more.
Failed traders normally do not give a talk about their failure and how they end up losing all of their hard-earned money. And that is why we heard about successful stories more than failure stories. That is when your brain systematically overestimates the chance of success. The new trader gets drowned in the illusion and mistakenly thinks that the probability of success is far away from zero when it is few decimals above zero. He is the victim of survivorship bias.
What is Survivorship bias?
Survivorship bias is one of the “cognitive errors” that our brain would experience. Indeed, it is a common fallacy. It distorts our judgment, a common logical error that distorts our critical thinking and judgment. It happens when we mistakenly take the success stories or stories of those who survive as the whole story and ignore the failures.
Survivorship bias in trading is dangerous and the chance of successfully making money is not as much as you thought. On the other hand, the chance of losing all of your hard-earned money is much more than you thought.
Most traders fail, most traders lose money, most traders do not become rich. It does not mean that we should not try, just that we should act with rational thinking and look at both sides: success and failure.
Anytime you find yourself watching too many YouTube videos about how traders living their lavish lives, how they spend money on luxury things, do yourself a favor by looking for the stories of failures as well.