PERSONAL FINANCES: SEEKING SUCCESS WITHOUT LETTING IT BLIND US
This article draws a connection between the beauty of archaeological sites and that of a vacuum cleaner... passing through the robustness of warplanes... It is easy to see that the connection does not seem obvious... And yet there is one! It lies in the way we reason. These different examples illustrate a bias that tends to negatively influence some of our financial decision-making: the survivorship bias.
Edouard Camblain
Investment advisor at Societe Generale Private Banking.
Seeing the dust under the carpet!
Perhaps you had the chance to travel and marvel at historical ruins that suggest a particular strength in the constructions of the past? What is the connection between the beauty of these archaeological sites and the efforts made during the sad period of the Second World War to reinforce the planes that returned riddled with bullets? Not much, except for a bias: the survivorship bias, also known as the survival bias.
This bias, with a somewhat sad name, consists of a tendency to focus, or even only remember, what has survived (in terms of success) and, at the same time, not remember or pay attention to what has not survived. Indeed, like the few Greek columns still standing, those that have resisted are much more visible than all the others. This bias was popularized by the statistician Abraham Wald during the Second World War, in his study on how to better protect warplanes returning riddled with bullet impacts. Rather than reinforcing the affected areas that had not prevented the plane from returning, the mathematician suggested reinforcing the intact parts: his conclusion being that when these parts were damaged, the plane did not return!
Just as we will only remember the strength of the Greek columns, forgetting all those that have disappeared, we will remember the great founders of successful companies in Silicon Valley, without paying attention to the numerous companies that do not survive1. And even for successful companies, the founder of a famous household appliance company regularly explains that he "made 5127 prototypes before succeeding, that is 5126 failures" before marketing his flagship vacuum cleaner! Less entertaining than our article on "the bias of ambiguity and the choice of lawnmower" but just as instructive!
Should we then conclude that it is normal to fail in financial investments before succeeding?
A help for reflection rather than an excuse!
A positive answer to the above question would probably make us more comfortable. But here, we prefer to draw some lessons from the survivorship bias rather than legitimizing the mistakes!
In personal finances, the major difficulty lies in predicting the future: a change in the macro-economic environment (inflation rates, interest rates...), achieving a target return, realizing a capital gain, etc. In this field, the survivorship bias boils down to an overestimation of the chances of success in an initiative, i.e. a focus on similar perceived successes even though they may be statistical exceptions ( "survivors") rather than representative cases.
Concretely, the risk of misunderstanding the past can be significant. Thus, studies examining the strategies or stock performance of companies tend to exclude those that have gone bankrupt or been acquired, which is why studying the long-term historical performance of stock indices can be complicated. There are numerous publications by researchers discussing the difficulty of judging the performances of fund categories, some of which may have disappeared.
Beyond statistics, the survivorship bias tends to exacerbate optimism. By focusing only on successes (forgetting that if 100% of winners have tried their luck, 100% of losers have too!), the perception of the reality and the probabilities of financial success in an investment can be distorted, leading to excessive risk-taking. Similarly, by focusing on a type of investment that has worked well for an investor, one may be tempted to see it as a systematically suitable solution, ignoring the troubles of other investors in the same asset class.
In short, it is important to pay as much attention to the less visible failures as to the successes!
Without going as far as 5127 drafts, this article has required so many invisible efforts!...
GENERAL DISCLAIMER:
Societe Generale Private Banking is Societe Generale Group’s business operating through its head office at Societe Generale SA, as well as departments, branches and subsidiaries located in the areas referred to below, under the Societe Generale Private Banking brand, and is the distributor of this document.
This is an advertising document and holds no contractual value. It is not intended to provide an investment service. In addition, it does not constitute investment advice or a personalised recommendation on a financial product, or advice or a personalised recommendation on insurance, or any form of canvassing, or legal, tax or accounting advice from any Societe Generale Private Banking entity whatsoever.
The information contained in this document may be amended without prior notice, and is for illustrative purposes only to provide the reader with information that may be of use in making decisions. Any information on past performance, even repeated performance, does not under any circumstances guarantee future performance.
The private bankers of the Societe Generale Private Banking entities can provide potential investors with more detailed information on the offerings, within their Societe Generale Private Banking entity, in the theme presented in this document.
This document is confidential and intended solely for the recipient. It may not be made public or disclosed to any third party, nor reproduced in whole or in part without the prior and written agreement of the Societe Generale Private Banking entity concerned.
Under no circumstances shall any Societe Generale Private Banking entity be held liable for any decision made by an investor on the basis of this information alone.
Societe Generale Group maintains an operational administrative organisation taking all necessary measures to identify, verify and manage conflicts of interest. To that end, the entities of Societe Generale Private Banking have established a conflicts of interest management policy aimed at managing and preventing conflicts of interest. For more details, clients of Societe Generale Private Banking may refer to the conflicts of interest management policy available on request from their private banker.
Societe Generale Private Banking have also established a policy to address any complaints filed by its clients. Clients may request this policy from their private banker or on the institutional website of Societe Generale Private Banking (www.privatebanking.societegenerale.com).
DISCLAIMERS BY JURISDICTION
France: Unless indicated otherwise, this document is published and distributed by Societe Generale, a French bank authorised and supervised by the Autorité de Contrôle Prudentiel et de Résolution (French Prudential Supervisory and Resolution Authority), located at 4 place de Budapest, CS 92459, 75436 Paris Cedex 09, under the prudential supervision of the European Central Bank (ECB) and registered with ORIAS as an insurance broker under number 07 022 493, orias.fr. Societe Generale is a public limited company (société anonyme) under French law, with capital stock of €1, 003, 724, 927.50 as of 17 November 2023 with its registered office at 29 boulevard Haussmann, 75009 Paris, France, and registered with the Paris Trade and Companies Register (Paris R.C.S) under the unique identification number 552 120 222. Paris. More details are available on request or online at www.privatebanking.societegenerale.com/.
In this merry month of December, we take a look at the letters sent to the man himself and consider the behaviours they...
Focus on Wealth Planning #4: Philanthropy
Healthcare real estate is undergoing a transformation, driven by major demographic, technological, and economic changes....
Focus on Wealth Planning #2: Protection of a surviving spouse
Focus on Wealth Planning #3: The Dutreil Pact