The Poison Looks Tasty

I inadvertently stumbled into a social media mess. It was a personal finance influencer sharing the story about how they (husband and wife) cashed out their retirement plans about five years ago, ate all the taxes and penalties for doing so, and invested the money into AirBNB properties.

Here's the moral of the story: We got rich doing this, and you can, too!

This, my friends, is THE definition of survivorship bias. I've talked about this subject before, but survivorship bias is the phenomenon where a small group of people who succeeded xyz becomes the the most visible people in the room, thereby communicating (intentionally or not) that their path is a recipe for success. One problem: The people speaking are the few who survived. They are the audible voices on the subject because, well, everyone else crashed and burned and doesn't want to speak of said trainwreck.

It's like your friend who goes to the casino. Notice how you only hear about it when they win big? We all know they are probably getting crushed most nights, but if we only hear about those huge payouts, we might start to believe going to the casino is a reliable path to riches.

I don't fault this couple for sharing their story. It's actually a pretty cool story. However, the post's comments are terrifying. Hundreds of people expressed interest in following a similar path, eager to make their millions.

This couple might have been skilled in their approach, but they also received some tailwinds by, with the benefit of hindsight, getting into the AirBNB game at exactly the right moment. The short-term rental model was gaining steam, interest rates were at all-time lows, real estate prices were reasonable, and they eventually rode the wave of one of the biggest price appreciations we've ever witnessed.

They won! But what about the other people who didn't get it right? The ones who started at a different time, or didn't get the right properties, or stumbled upon crushing issues, or missed on record-low rates, or jumped in after the short-term rental market was saturated?

The book Rich Dad Poor Dad is another wonderful example of survivorship bias. It advocates taking massive financial risks in order to accelerate wealth building. The author's personal testimony shows it works, as do the testimonies of thousands of his loyal followers. What's not visible, though, are the tens of thousands of people who had their lives destroyed by following this advice: the non-survivors. These people played a dangerous game, and lost. Meanwhile, for the maybe 5%-10% that actually survived such rash decisions, their voices speak the loudest (because they are the only ones speaking).

Survivorship bias is everywhere. Unfortunately, it's hard to shake people from its electrifying allure and dangerous consequences.....until it's too late. If you have friends or family members who have stepped into something questionable, I'm sorry. You might not be able to pull them out of it, but you'll be there to help them pick up the eventual pieces.

In the meantime, be mindful of your own decisions. Shiny objects are everywhere!