Sunday, July 23, 2017

Survivorship Bias and MLM's

I've been thinking a lot lately about survivorship bias and how it can cloud our judgment in evaluating financial opportunities.

We are guilty of survivorship bias when we see someone being successful and think that all we have to do is do whatever they did to reasonably expect the same results. What this way of thinking ignores is that in most cases MANY other people have done some of the exact same things and yet haven't had nearly the same success.

Survivorship Bias Unpacked

For example, If we were to stage a competition of flipping coins where you advance to the next round simply by flipping heads, you would expect to lose about 50% of coin flippers in each round. If you start with 1,024 contestants, you'd expect the number of participants in each round to be roughly:

1,024 -> 512 -> 256 -> 128 -> 64 -> 32 -> 16 -> 8 -> 4 -> 2 -> 1

So after 10 rounds, you'd expect to only have one person left. Is he/she the best coin flipper in the world? How else is it possible that they flipped heads 10 times in a row! We need to interview them and have them give motivational speeches and buy their books, etc.

Seems pretty ridiculous, right? Except we do it all the time when we prop up legendary investors, the 19-year-old in California who won the lottery twice in one week, or those rare few individuals who achieve some degree of financial success with a multi-level marketing company.

What we miss in all of this thinking is that there were 1,023 other people who did the exact same thing and didn't get the same result. We admire the sole survivor, yet ignore the existence of the other competitors. Nassim Taleb has written extensively about this and related topics in his book Black Swan but you really can't go wrong with reading any of his books.

MLM Survivorship Bias

It's the MLM's that really get me with this. You know how this works by now. You get a Facebook friend request from someone you haven't heard from in years and accept it thinking "oh, I wonder what they've been up to". After accepting, you check out their profile and quickly notice that they're involved in Rodan & Fields, or Beachbody, or Lipsense, or Isagenix, or Herbalife, or Essential Oils, or whatever else they dream up next. Now that you're 'friends' they've got a great 'opportunity' for you to 'be your own boss' and generate 'passive income'. They make it sound so easy and they all seem to project an air of success, following the 'fake it 'til you make it' strategy.

This got under my skin recently when a friend of a friend went all over social media touting all the success she's had selling makeup through an MLM. She's reached a new level and qualified for a free trip to a resort in Costa Rica. Good for her. She's just doing her job, and so is the company. She gets a nice trip, and now probably dozens of people see what she's doing and now want to get in.

For every success story you see in any MLM, there are literally thousands of failure stories you'll never hear about. If you've got Netflix, I recommend watching Betting on Zero. I'm glad that this is helping get the issue out there, but I'm not sure these pyramid scheme type of companies will ever go away. The lure of a simple path to wealth and riches is too appealing, even if too good to be true. There is no simple or fast way to wealth. It requires hard work and time.


  1. I'll have to check out Betting on Zero. I am always more than a little "annoyed" (to be polite) by the MLM Schemes out there and how many people see an MLM as their golden ticket to easy wealth... while in reality they end up alienating friends and family while sometimes putting their own finances in jeopardy.

    I know that may not apply to all MLMs, but many of them just rub me the wrong way...

  2. I've gotten to where I absolutely abhor the MLM scams. I immediately block anyone who invites me to that crap, because they're just using our peripheral friendship in the hopes of making $20 from me. There are much more efficient ways to make money, y'all! Do freelancing, walk dogs, babysit. But selling other people's products by spamming your friends and family just isn't the way to do it.

  3. No, I think you're being too nice. I'd say all MLM's have some degree of inflating the opportunity. The MLM itself may not do it directly, but they don't stop the distributors from making false claims either. The saddest part is to see people I care about get sucked in. I have a relative who has been part of an MLM for 2-3 years and he is still hoping to reach the point where the products he buys are covered by commissions he earns. Betting on Zero talks about one mans crusade to bring down a large MLM and the message I'm sure apply to many others.