Many of us believe that censorship is a bad idea. This is not just a political issue, however. It is also an investment one. We investors face far more censorship than you might realise – and it is bad for our wealth.
To see how, think about Aim shares. What comes to mind? There’s a fair chance you’re thinking of Asos; if you’d invested £1,000 in this when it floated in 2001, you’d have almost £200,000 now. But Asos is wildly atypical. For every Asos there is more than one ScotOil or DebtFreeDirect or African Minerals, all of which lost everything. But it’s easy to forget these because our perceptions are distorted by survivorship bias. In effect, our assessment of Aim stocks is censored. Bad ones don’t loom as large in our minds as they should.
In a new paper, David Hirshleifer at the University of California at Irvine shows how this censorship causes people to over-invest in “moonshots” – projects with a large chance of failure but small chance of great success. The fact that the FTSE Aim index has under-performed the All-Share index since its inception in 1995 is consistent with this: investors have paid too much for the small chance of great returns, perhaps because they over-estimate that chance.