Example
The eponymous sharpshooter takes a rifle and blazes away at the side of a barn. They then carefully paint a target around the bullet holes before inviting their friends around to gawp in astonishment at their new found gun-toting expertise. It's clever, but it's an illusion..
Mutual funds and hedge funds do this with something called instant history bias or backfill bias. They create a bunch of new funds which invest more or less randomly in stocks without making this public knowledge. After a few months or even years one of these funds will, by random, have done exceptionally well. All the failures get ditched and the single, sharpshooter, success gets marketed with all of the usual fanfare. And once you start looking for this it's everywhere: every tip sheet, every investing theory, every self-confessed expert.
The eponymous sharpshooter takes a rifle and blazes away at the side of a barn. They then carefully paint a target around the bullet holes before inviting their friends around to gawp in astonishment at their new found gun-toting expertise. It's clever, but it's an illusion..
Mutual funds and hedge funds do this with something called instant history bias or backfill bias. They create a bunch of new funds which invest more or less randomly in stocks without making this public knowledge. After a few months or even years one of these funds will, by random, have done exceptionally well. All the failures get ditched and the single, sharpshooter, success gets marketed with all of the usual fanfare. And once you start looking for this it's everywhere: every tip sheet, every investing theory, every self-confessed expert.
Causes
We fall for this nearly every time for the same reason we suffer from confirmation bias - we find it very difficult to think of counterexamples when we're presented with positive evidence of some behavior or another. It's one of our brains' short-cuts, we look for good-enough solutions and we don't conduct an exhaustive search of all the possibilities.
Mitigation
This is so common that it should be our default assumption when anyone presents us with some apparently incontrovertible evidence of ... well ... anything to do with investing or markets or anything at all. Life is rarely so simplistic I'm afraid.
Part of our investing checklist should be to demand that anyone offering such solutions identify the shortcomings. If they can't or won't then they're peddling snake-oil. There are no free lunches, although there are often gravy-trains for those who know how to hitch a ride.
Part of our investing checklist should be to demand that anyone offering such solutions identify the shortcomings. If they can't or won't then they're peddling snake-oil. There are no free lunches, although there are often gravy-trains for those who know how to hitch a ride.
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