Back in June I explored The Unknown Unknowns and Survivor Bias. It turns out that listening to the handful of people who make it big is intrinsically misleading: Survivorship bias: why 90% of the advice about writing is BS.

Here's how this works: big-bucks Author Z says, here are the 10 steps you need to take to become as successful as me. The list always mentions perseverance, being nice to your readers, writing 1,000 words a day and so on.

The 99.9% of writers/authors who make less than $10,000 a year from their writing (and the 99% who make less than $1,000) take this list as a script or program that if followed, will yield great success. But the 99% follow the script and do the 10 things and discover they are still unknown and not making any money.

The point is that nobody asks the 99% who fail to make it big what they did, or try to analyze what they did that prevented their success.

The numbers of people who become successful in these sorts of high-competition careers is vanishingly small--hedge fund managers are an example, along with musical acts, artists and writers. A handful at the top make most of the money, a relative few make some money (let's say a middle-class income) and then 99% make near-zero.

Longtime correspondent B.C. recently sent me an analysis of how many mutual fund managers outperformed a "dumb" low-cost index fund. B.C. found that 66 managers out of 26,507 outperformed the SPX over 5 years. That mirrors the distribution of outsized success among hedge fund managers, a few of whom net $500 million each annually while the rest underperform a plain old index fund.

The conclusion is that luck is the ultimate factor in these signal-noise levels of success, and being in the right place at the right time with the right product/idea can't be replicated by following a script or list of tips.

Another take on the same concept is elegantly explained in Survivorship Bias The Misconception: You should study the successful if you wish to become successful.

The basic idea here is that studying the aircraft that come back riddled with holes from bombing missions leads us astray when we try to analyze the damage: what would really help us is studying the planes that were shot down, but they are unavailable for study.

the same principle applies to restaurants: the few that become roaring successes are endlessly studied, but the causes of success and failure are actually buried in the stories of all those that failed and close their doors. But nobody collects that data, for a number of reasons, including the study of failure isn't sexy and won't sell magazines.

We know that we learn from mistakes and failures, yet the study of failure is never recorded or saved unless the company or individual "came back from the dead" and the entire chain of events from near-death to recovery are saved for study.

Aaron Krowne of the ground-breaking Implode-o-Meter sites recently submitted an insightful commentary on survivorship bias:

There's another aspect of the problem you mention in your "survivorship bias" post.

One can, in theory, accept the premise that one can learn most about a successful exemplar, at the point in time they succeeded, by studying that exemplar. After all, surely we will recognize its/his/her unique attributes.

But even when that is the case, there is a second problem, which that pretty much squashes all hope of replicating their success: in fields such as markets, or any which is adaptive (so virtually every competitive human endeavor), the milieux responds to the success, and so the same attributes or actions cannot achieve the same result the next time around.

Even worse, when the supposed "formula" is communicated to the masses, the effect is compounded, as you now have the bulk of the "agents" in the market acting on that same formula. In markets, we often call this being "priced in".

Conclusion: whether or not the "formula" is merely an example of survivorship bias or conveys genuine working advantage from a past point in time, the common man cannot expect to replicate an exemplar's success by copying that formula.

He can of course likely improve his chances by increasing his discipline over the (inherently un-disciplined) average competitor (after all, remember that most people don't even read, to any meaningful extent), but there is a wide gulf between being above-average and being a superstar, independently wealthy, a "top dog", etc.

Corollary: the average man cannot ever hope to win with "investments" (or the world of finance in general), but must be content with savings. Unfortunately, in the absence of sound money, we don't really have "savings" anymore, which is why the whole world has effectively been converted to economic sheep for the slaughter, a kind of "superadvantage" of those who run our economic system.

Thank you, Aaron, for this thought-provoking analysis. As Aaron noted, how can all those checklists of highly successful people work when a majority of competitors are following them? I tend to think Jerry Garcia's suggestion has the most practical value for most of us: "You do not merely want to be considered just the best of the best. You want to be considered the only one who does what you do.”


If You Seek Practical Gifts, Consider These Everyday Kitchen Tools