Survivorship Bias: An Academic Charade to Ignore Trend Following

From Wikipedia:

“Survivorship bias is the logical error of concentrating on the people or things that “survived” some process and ignoring those that didn’t.”

From the Wikipedia entry on me:

“Critics of Covel point out that his studies do not address survivorship bias.”

I challenge anyone to show me where the trend following failures are not outlined in my second book (as but one example). Not only are they outlined, the “whys” are explored.

Bottom line, if you are going to raise the flag of survivorship bias when discussing trend following, like Jim Cramer protégé David Merkel, you need to name those exact failures and outline the reasons for failure. Just saying there were failures, without being specific to anything, is a charade.

21 thoughts on “Survivorship Bias: An Academic Charade to Ignore Trend Following

  1. Thats the point in survivorship bias, you can’t concentrate on the failures because you don’t know them. Why on earth would anyone know about the failures? You know about the successful ones because they are still in the game and therefore can be studied. The people who got nowhere and quit can’t be studied because they aren’t there anymore.

  2. Most people consider trading as investing, they buy cheap and want to sell expensive! no idea on price dynamics (how the price moves), no risk management, no diversification.

    I have heard many stories of people trading the stock market, some are lucky on the short run, but those whom try again seem to end up losing it all.

    So there is no really a need to spell it out for them, why people lose in trading.

  3. Yes it does but it concentrates on a small group of traders. There would literally be thousands out there who didn’t succeed and you and I don’t know about them. That’s not a slur on trend following, it just shows that trend following (as with all strategies) suffers from survivorship bias.

  4. People don’t succeed in many areas of life for many reasons. If you don’t examine the reasons for failure, and just yell “the winners are all the lucky survivors!” (which is what people who argue this do) … that’s just plain inane.

  5. “Yes it does but it concentrates on a small group of traders. There would literally be thousands out there who didn’t succeed and you and I don’t know about them”

    The thousands your talking about are losing money to the few succuessful ones. In every area of life there are certain people who are the best at what they do.

  6. Thinking in terms of process is different from analyzing the results statistically.

    The thousands that didn’t succeed failed for the same simple reasons.

  7. What i am trying to say is even if you put up a winning trading system online for everybody to see, with the rules, tactics, and every other detail outlined for people to follow, a lot will still fail. It doesnt mean there is something wrong with the methodology, it means we are only human. The people who failed will still go on and try to find their true calling. Might be something completley unrealted to trading.

  8. Let’s cut to the chase: people who argue against trend following with the notion of survivorship bias do so because they want to pretend that some of the big names are just lucky survivors. They want to pretend that millions of monkeys were all given a keyboard and a few got lucky enough by randomly banging on the keyboard to write Shakespeare… while the others all perished. The evidence says that argument is a load of shit.

  9. The thing that counts is “HOW” they got there!

    It’s always the academic/armchair types that throw around the “survivorship” argument.

  10. “HOW” addresses questions surrounding both “winners” and “losers”! It provides a complete answer.

  11. this whole “survivourship bias” thing is for haters… In the long run luck plays a miniscule role

  12. It’s sad that so many people don’t understand what survivorship bias actually is. It isn’t a criticism. It isn’t a compliment. It has nothing to do with luck or disproving anything. It is simply stating that data from those who succeeded is used more frequently that those who didn’t simply because the failures don’t offer any data (most of the time). Can anyone here honestly argue that there is as much data on the failures as the successes to analyze?

    There you go.

  13. There is plenty of data — you just need to do the homework. And I am not talking quantitative data, but rather qualitative data — that’s where the insights come from.

  14. I second Michael on this:

    “Rules” have to be embedded within a system and tested for performance experimentally.

    You have to study how the data is “generated” and how it changes over time.

    Such things cannot be evaluated statistically on a stand alone basis.

    Jamal, I suggest you bone up on the basics of systems thinking/dynamics.

  15. There’s a few obvious points being overlooked here by the “trend following displays survivorship bias” crew
    Where are the big trend following funds that have failed
    Surely we would know about them – just like we know about all the big long only funds that have failed and the big macro funds that have failed – they were there – and now theyre not – they failed !
    Where are the TF funds that have failed ? I can see about 3 and none of them failed due to performance they failed due to inability to raise funds as idiot investors thought their 3 years of making 30% was pure luck
    Oh and theres Dekker Capital Mgt – he was a TF who blew up because he said to hell with my rules I’m gonna trade discretionarlity
    So I say to people in this topic – Give me some example of Big TF’s who failed ?? They were there for all to see and now theyre not – who are they
    Answer = they dont exist

  16. “Nine-tenths of successful investing is luck. The other 10 percent is being prepared to capitalize on that luck” — Jim Cramer

  17. Trend Following requires a dedication to the strategy. I have subscribers to my TF strategy who tell me that sometimes they do not follow that strategy. In most cases they wished they had. So I agree,individuals act according to their personal preferences and emotions, which may be at odds with any strategy.

  18. “Nine-tenths of successful investing is luck. The other 10 percent is being prepared to capitalize on that luck” — Jim Cramer

    Every indvidual trade is based purely on luck, but in the long run luck doesnt mean shit…

  19. True, Nader…I quoted Cramer to get a rise out of Michael.

    Our goals as Trendfollowers is to “become the casino.”…we put the odds in our favour and over time it leads to huge gains if approached with discipline and consistency. Problem is, 99% of the population doesn’t have the discipline and they either run around chasing rainbows in the market or turn into zombies who watch their Nortel stock go from $120 down to zero with “buy” recommendations from their brokers all along the way.

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