The World’s Greatest Coin Tosser and the Survivorship Bias

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10 May The World’s Greatest Coin Tosser and the Survivorship Bias

Darren Bown is a British TV personality and the host of The System, a documentary produced by UK television network Channel 4.

He is an illusionist, someone who specialises in harnessing the power of the mind. Derren also happens to be known as the greatest coin tosser in the world. Here is a video of him tossing a coin and having it land heads up 10 times in a row.

By any account, it is an amazing feat and an incredible video.

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How does he do it? 

The internet is abound with theories about how he managed to pull off the stunt. Despite the producers insisting that it was shot in entirely one take and there was no editing or special effects built in, many insisted that the video is but a combination of many individual flips.

Others felt that it can be easily done with a special coin, one with both sides showing heads. The fact that the video clearly shows Derren flipping a two sided coin holds no water with them.

Another group claims that it is a magnet acting on a loaded coin. One more school of thought suggested that Derren had a special way of flipping the coin, that he practiced to get exactly ‘n’ number of rotations in order for the coin to land heads up each and every time.

Unfortunately, none of the above is the correct explanation

The Truth

The truth is, there is no magic. Neither is there any trickery involved. On the contrary, Derren and his production team spent nine hours flipping the same coin to get it to land ten consecutive heads in a row. They videoed every attempt. It is something anyone of us, with the right amount of patience, can achieve.

This follow up video explains the situation. All the previous videos that Derren made were useless and trashed. The only clip that survived is the final one.

The Survivorship Bias

The Survivorship Bias is a logical fallacy. It focuses on people or things that survived some process and overlooks those that did not. It is a thinking error, one of the many that you and me make all the time.

On many of these occasions the implications are unimportant.

For example, we come across an original Volkswagen Beetle car that is still running like a dream after fifty years. We insist that the built quality of yesteryear cars is definitely superior to modern day vehicles.

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We fail to understand that the Beetle is one car that survived. All of its compatriots from the same era did not. To say that cars were better built then is testament to committing the Survivorship Bias.

Closer to home, we lament about declining culinary standards in our hawker centers. Hawkers of yore put their heart and soul into their craft and their food is so much tastier. It will be a waste when the older generation of hawkers call it a day because the younger ones really cannot make it.

Survivorship Bias once again. It is not that there is no sucky hawkers from the good old days. It is just that only the good ones survived.

Money Matters

When it comes to investment and money matters, the stakes are a lot higher.

The Survivorship Bias lies at the heart of many scams and con jobs. Imagine if you were to receive an unsolicited email from a self proclaimed market guru who insist that he is able to make accurate predictions about the market direction. He calls for a rise in the market next week. He is spot on and the market does exactly as he predicts.

He then proceed to make ten consecutive correct calls on the market for the next ten weeks. He knows exactly what the market will do. It is almost magical. He has gotten your notice and even more importantly, your trust. Even the usually skeptical you would be taken in and be tempted to part with a large sum of money for his subsequent views on the market.

Unknown to you and many others, it might just be the work of a con artist who calls for both a rise and a fall in the market at the same time but to different groups of people. Those to whom he makes a wrong prediction, he would simply discard them from the list. The other half which he presents the right prediction to, he will continue with them the week after.

He only need to start off with a large enough group. The law of large numbers and the Survivorship Bias will see that he is richly rewarded for his industry eventually.

Unit Trusts

When it comes to investing in funds, BigFatPurse’s stand has always been very clear. Actively managed unit trusts tend to underperform the market. An exchange traded fund that passively tracks the market you want to have exposure in is more than sufficient to provide a positive investment outcome.

Imagine you want to find out how unit trusts are doing as a whole. You decide to measure the performance of 100 different funds now, and at the end of 5 years. Assuming that after five years, ten percent of the funds close down due to underperformance.

The performance of the remaining 90 funds are tabulated. This figure is grossly overstated because the performance of the worst funds can no longer be measured. They have been removed from the system. We end up looking only at the survivors.

In a study by Vanguard published in 2015, they had wanted to account for the Survivorship Bias by including the performance of unit trusts that are closed due to underperformance. The already dismal results of unit trusts in general are given a further death twist.

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Percentage of Funds that Underperform the Market

Across all sectors, the number of funds performing below their market benchmark is more than 50%. After accounting for the Survivorship Bias and including funds that closed down, even funds tracking the 3 best performing sectors UK, Eurozone and European equities perform worse off than the general market. The results are extremely damning for the industry.

Warren Buffett

I want to end off this article with everyone’s favourite investing uncle Warren Buffett.

For the record, I think he is an extremely talented investor. His acumen and insight and consistency makes him irreplaceable.

However, the laws of large numbers also dictate that superstar investors will exist in our midst. There are millions (if not billions) of investors in the world. Half of them can fail each time. The remaining half can fail again. And again. And again.

If a large enough sample is taken, there will always be some people with improbable success. And that person is none other than Warren Buffett.

In life, we tend to worship the winners because they survived. From Derren Brown’s coin toss to the Volkswagen Beetle to Warren Buffett. Falling prey to the Survivorship Bias distorts our version of reality. Rational investors should take heed.



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