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In his book, A Random Walk Down Wall Street, Burton Malkiel illustrates the idea of survivorship bias among mutual fund managers by describing a popular investment newsletter scheme. It goes like this:
- Start eight investment newsletters. In four of them, forecast that the stock market will rise. In four of them, forecast that the stock market will fall. At the end of a year of enthusiastic proclamations, four of the newsletters will prove to have picked wrong. Close them down.
- Now four newsletters remain. In two of them, forecast that the stock market will rise. Maintain the opposite prediction in the other two. At the end of the year, close down the two that went wrong.
- Now two newsletters remain. Apply the same policy, leaving one newsletter alive at the end of three years.
If you put out such a letter, you would look like a genius to one out of eight newsletter subscribers and probably generate tons of demand for subscriptions. In reality, you just take advantage of the idea of survivorship bias. Fund Managers and Brokers have been accused to have benefit from such a phenomena for years as they can put out tons of funds or stock picks, allowing for luck simply to run its course, and failure to be pushed below the surface.
But what about the media? Financial media (especially financial bloggers) benefit greatly from this phenomenon. Whether they realize it or not, they are in a business that is not much than an investment newsletter. Let's use CNBC as an example. On Squawk Box in the morning, filling in the 80% of deadspace in between news, earnings data, and economic data releases, there is a handful of pundits giving their predictions on the market. Usually these are Analysts, Traders, Economists, and Fund Managers and the person watching the show daily for a 30 minute block will get many predictions thrown at them. CNBC usually then gives the opportunities for those pundits to come back, refer to their prior prediction, and make a new one. The pundits that are "in-vogue" are the ones that make a string of timely predictions and go out of favor when the market turns against them and another pundit replaces them. Many would argue that Jim Cramer is similar in that he gives many stock picks every day, however for all the criticism he receives he is one of the few who actually go over some of the bad picks - eliminating some of the survivorship bias.
Magazines and newspapers such as Barrons or Forbes are no different. They many different columnists that make many different picks, and usually follow up on the ones that were successful rather than the ones that went bad. They also sometimes review their picks, but rarely if they all went sour.
Bloggers (myself included) are even more interesting. Bloggers usually have an underlying theme to their form of media. While some just try to pick stocks, most have a commentary on the current landscape and provide their view on where the economy and markets are going - either explicitly or implicitly. They are much more like the writer of one newsletter among many. Unlike traditional media, their media can be searched for, and their predictions are also archived. They benefit, therefore, usually by writing about what WILL happen before it actually occurs as people begin to search for certain keywords and stories on topics as they are developing and the "in-vogue" bloggers are then quoted by many Aggregators, etc.
One example from my blog is my story on Money Market Funds from August, Money Market Madness. This post is my most viewed page and has generated more Google hits than the rest. It was written the day that this story hit and contained many predictions which were right on the money (widening spreads, next shoe to drop, etc.) and could make me look like a genius to someone who searched for it a month or two later (and it may have as my readers went up along with incoming links to that page). I don't mention this to toot my own horn (I did nail that one though), but to illustrate a point. That week I also wrote about a post about KKR that was also speculation and hasn't turned into anything as of yet (as far as I know). But if it had come true, and not the problems with Money Market Funds, it would have been searched for and linked to and referenced and I would look even better. Bloggers therefore benefit from the creator of ultimate survivorship bias in digital financial media - Google (and Social Bookmarking sites such as Digg, del.icio.us, Stumble). If a blogger writing about many different financial topics and stumble on a big one, their Google Page Rank increases, Technorati Authority skyrockets, people subscribe to their feed, submit them to social bookmarking sites, and as future posts on topics are written, they are the ones who "survive" as they are on the top of searches.
Financial Media, unlike the fraudulent investor newsletter author, does not benefit from survivorship bias by cutting their "predictions" in half, but increasing them as much as possible. Since their audience is by and large "fixed" the survivorship bias comes in to place on who is left reading them. This also explains why MSM Financial Media is more trend-oriented and bullish and the blogosphere more contrarian and bearish. Since entities such as CNBC and the WSJ have very few competitors and reader base that consumes their media in real time and pretty much only in real time, they have the incentive to trend follow and report on the current trend and its continuance. Nobody goes back and reads the last two months of Wall Street Journal columns or watches the last week of Squawk Box continuously, they read the current issue, and watch what is currently on. Since their archives usually don't "survive" they have the incentive to just live in the now and hug the trend - which is bullish 2 out of 3 years. Betting on reversal would lose them great credibility in the long run
A blogger on the other hand, has the disadvantage of having to rely on the MSM for the actual news. They are always behind the trend from the start. Also, they compete with many other bloggers as well as MSM for readers who want to know their opinion on this news. Since they rely on search traffic and have readers that usually read a string of posts or a certain category or tag of posts, they have the incentive to make predictions that are against the grain. People search when they are facing uncertainty about anything - whether it be the phone number of a restaurant, or the outlook on the economy. So when times are certain, and the MSM is selling certainty, it is much more beneficial to write about the unknown and sell uncertainty. On days when markets are unstable, I get many more hits than when they are stable. This is due to many words of instability that permeate my posts - such as "recession", "subprime", etc. Since bloggers benefit greatly from operating on long tail, and the long tail in finance are lower probability or unlikely events, they are more inclined to pursue this part of the financial distribution to gain share in the blogging popularity distribution.
Although media personalities and bloggers generate success on the way that they write or speak, much of their success depends on what they write about and what actually occurs. If they write or speak more and more on many topics that are contrarian in nature, they put themselves in the seat to be a survivor amongst the many who do not operate like this. No wonder financial blogging is so stressful.
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