Survivorship Bias

Wikipedia definition

If we were to look up survivorship bias on Google we'd be presented an image of this warplane riddled with red dots. The dots represent high caliber bullet holes aggregated across multiple planes that somehow managed to survive an epic air battle. Take a moment to look at the picture and imagine what changes you'd make to the aircraft to ensure more of them would survive instead of crashing into the ground.

This is the thesis of survivorship bias.

Many people would and did look at this image and think:

We should reinforce the areas that got shot up.

That way these areas that have been shot will be less damaged.

And then one smart person in the room stood up and pointed out that these planes SURVIVED. Meaning the areas of the plane that need to be reinforced are exactly the opposite of where the bullet holes are. This truth soon became obvious to everyone. If the plane gets hit in an area where the survivors didn't have bullet holes: then it dies and never returns to tell the tale. Dead men tell no tales.

Survivorship bias is a form of selection bias that can lead to overly optimistic beliefs because multiple failures are overlooked,

In this particular case these are the areas that actually needed reinforcement. And it makes logical sense too. As the plane gets narrower there's a chance that a weak point will break off and the entire device will succumb to complete systemic failure. However, the tips of the plane do not need to be stronger because they don't support as much force.

Obviously if the plane gets shot in the cockpit or the gunner's seat the plane is doomed. Same with the engine, gas tank, or navigation system. So not all sections can be reinforced but the highlighted areas could, which ended up making these planes more effective in combat.

… Thinking he could end the rebellion with one swing of his sword.

Everyone wants to be a hero!

We hear the war stories of veterans who received such and such metal for bravery and outstanding service. We watch movies like Rambo and Die Hard where the protagonist is a one-man army and carries the entire burden of the conflict on their shoulders. Out here in the real world, that's the perfect strategy for ending up dead in a hurry.

Nobody talks about the guy who charged a fortified machine gun position and got cut in half by a 50 cal. No one is singing songs about that guy, but they will sing songs about the one idiot out of 100 that actually survived and secured that key position. Doesn't mean it was smart, just that the one guy got lucky as hell.

Shitcoin Casino

A lot of people think they can go into a casino and play on a slot machine that hasn't paid out in a while. Surely it will pay out soon, that's just simple math! Yeah, that's not how it works. Others will make the exact opposite claim and play on a machine that has paid out a lot because it's "hot". Again, humans are very good at finding false patterns in completely random outputs. We have to learn to tell the difference.

How many times have we read a crypto headline that reads something like:

Guy who predicted that thing that happened says this will happen next!

Again, this is survivorship bias, and completely meaningless. That guy who gambled and made money once doesn't have any insight into the future. In fact they tend to be good counter-indicators because they are overconfident from their previously earned acclaim.

For confirmation of this look no farther than Michael Burry, the guy who made a mint shorting the housing market in 2008. They even made a movie about him staring Christian Bale called the Big Short. Guess what his subsequent bets were.

The first was buying water rights in the mountains to capitalize on a potential water shortage, and the next was investing in police industrial complex stocks. None of these investments have really paid out and all his market calls on Twitter are wrong. He's rage-quit deactivated his account like a dozen times.

At the end of the day no one should strive to be like Michael Burry because Michael Burry is a piece of shit that tries to profit from human suffering. We could of given him a free pass on the one thing because it was obviously going to happen no matter what, but what about everything he's done since? Terrible optics are terrible. Survivorship bias strong. Nobody remembers to reference the fails.

"We should all win the lottery to make money!"

Survivorship bias is looking at a lottery winner and thinking buying lotto tickets is a legitimate way to make money. Mathematically we all know this is not true, and that on average pretty much everyone is going to lose money. It doesn't matter because survivorship bias (emotion) is stronger than logic and reason within society. I don't make the rules.

As it applies to crypto

We see survivorship bias on a daily basis within the cryptoverse. Everyone sees meme coins moon and that the winners of the shitcoin casino are up millions of dollars. Teenagers jump onto social media talking about what geniuses they are for getting into NFTs early. Again: these are all lottery winners. Their opinions are less than worthless. Nobody pays attention to the guy that put all their money into meme-coins and NFTs and lost everything. That's just the way it is.

Final example

In DEFI 2020 everyone thought it was a good idea to create liquidity pools that were paired to random tokens. They then incentivized these LPs with emissions from the DEFI token, even though they provided zero liquidity or value to the main asset. Why did they do it? Because of survivorship bias. It's a strategy that worked for the first iterations for a limited amount of time, but then the market pivoted and just used them to leech value and dump everything on the community.

This is a great example that shows that entire communities can experience collective delusion when it comes to survivorship bias getting married to economic policy (cough HBD yield cough cough). The point of crypto is to prevent hyperinflation, but DEFI 2020 showed us that our foolishness will lead to hyperinflation faster than any fiat currency in existence.

Conclusion

Ironically, I'm infinitely bullish on networks like Hive and Bitcoin because these are survivor networks. They are protocols that should have died a dozen times over but here they are still chugging along. Am I being biased because they survived? Or is this just common sense? Sometimes the answer is not so obvious, but my opinion has already been made clear.

Never focus on the big winners. This is a woefully incomplete dataset. In order to get more well rounded information we must consider an action to have a wide range of outcomes. If we ignore the failures within that range: our chance of coming to incorrect conclusions skyrockets exponentially.

Posted Using InLeo Alpha