The Winner Keeps it All ...

WE GET attracted to what others do. Be it anything, this attraction makes us vulnerable to the world around us. 

Recently, I met Sriram Rajagopalan, a retired engineer from Chennai who won Rs.230 crore in the Emirates Draw MEGA7, in UAE. It was a good story in Business Standard which kept talking to me. 

News like that of Sriram always colours what I occasionally do: lottery! These wins highlight how some people defy the odds and remain lucky. 

Survivorship bias influences almost everything we do. It is one of the most hidden aspects of our proposition of everyday living. Right from the morning to the close of the day, we hear and record more reels about success stories of the world around us. And we attempt some of them. Is there anything wrong with it? Yes… the truth is that we don’t hear as much of the hundred thousand who could not hit the jackpot or a lottery than about a Sriram story. 

Our frame of reference is always a success. And this is most common in the world of business journalism. Every business story we read and re-read is that of success. The hot chocolate business, an Academy Award-winning movie or the rice-batter start-up… we read the winner into our hearts. The survivorship bias lets us blind to the hundreds of others who have been beaten out of those businesses. The truth is, that failure is far more common and is present than most of us realize. 

One of the most important qualities of a good investor is to realise success is a rare and delicate thing in Dalal Street as in everyday life. Success in investments should be an ongoing story for everyone. It isn’t a one-day bull run story or something we achieve because of our special status and undeserved privilege in filtering news early. Often, what happens is that we become deeply flawed in understanding the whole world around us as a complete story. Due to the overdose exposure to success stories and the success prognosis of market pundits (through the media and the world we see), we are led into investments we don't understand. We miss the totality of these stories. We miss out on the full set of data and focus only on a narrow window of numerical figures which tells our mind only about the success stories. We get carried away by one Sriram Rajagopalan or one Karsanbhai Patel to feel that we too can win a UAE lottery or produce another Nirma. Survivorship bias skulks within us to replicate the same story as that of Sriram or Karsanbhai…. and we have just heard only the success part of their story.

I asked AMFI (Association of Mutual Funds of India) recently to furnish me with data on the number of mutual funds which have closed or merged with other funds in the last 20 years. (I am yet to hear from them). The real story of mutual funds in any nation is that a sizable number of funds underperform, fail, close or merge with stronger funds. And they are seldom spoken of. This data is not considered when mutual funds are studied for their performance across the industry. One always gets an overstated figure as too much weightage is given to surviving and performing funds. But, add all funds in the family, and you get a compromised figure for the funds outperforming their specific benchmark. Another area in the stock market where survivorship bias plays is when we chase past winners or are overconfident in historical performance.  We should examine the circumstances of each winner, and their environment, together with those who scripted similar stories and have lost. Only this will give us a better understanding of how they lost. This will also give us a better understanding of the stock under review.

Someone is gonna win the lottery, some stocks are going to outperform, some fund managers will do well, some coffee-brew will take off, some books are going to be best sellers…but we forget the 100s and 1000s and millions of losers around each of these podiums. The winner takes it all does not mean that most people win… no, most lose, very few win and fewer handfuls win to outperform all others. Survivorship bias hides the losers and projects the winner. 

Yes, buying more lottery tickets technically increases one’s chances of winning - but only slightly. Each lottery ticket is an independent entity or an event. Unlike other situations, the odds (chances) don’t accumulate. If the probability of winning is 1 in 10 million, buying ten tickets will not make it 10 in 10 million. Instead, each of these tickets offers only the same 1 in a 10 million probability.  Only a slight improvement in chance happens as the buyer’s presence is there in all those 10 separate chances. 

“The moment I got your call, my world stopped. My hands shook. My heart beat so fast, I thought time itself had frozen,” says Sriram Rajagopalan. 

As Sriram shakes in disbelief, I go on my phone to find out when the next Emirates MEGA7 game is. 

Survivorship bias is lurking around me!

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