Consequently, there are no Jeremy Siegels promoting East German stock investments.

U.S. stocks are the Michael Jordans of the investing world. No sane person would decide how much time to practice basketball with the assumption that she or he could be the next Michael Jordan. Similarly, no one should decide how much to invest in stocks based solely on the history of U.S. stocks.

Thus, in addition to the U.S. stock market performance, we should consider the outcome of other markets. Consider some of the debacles that faced equity investors in major markets around the world just in the last century. Russia, China, and much of Eastern Europe became communist with state ownership of much or all business. Germany suffered through hyperinflation and destruction in World War II. The allies in World War II similarly destroyed Japan. By some measures Argentina was richer than France a century ago yet has had severe economic struggles since then.

Some people argue that the poor performance of stocks in countries like East Germany is irrelevant. The argument goes something like, Equity investments in a place and time where property rights are not respected (or are so heavily taxed) will always be a poor bet. Communist markets of any kind by their nature have to be inherently fictional-a government made-up number.

So is it fair to include East Germany? The answer depends on the time period you analyze. No sane investor would have wanted to own East German assets after the country was taken over by the Soviet Union. The investor back in 1802, however, had no idea that part of the world would become communist (Karl Marx was born in 1818) and part of the communist world would be called East Germany. So the part of the world that ended up becoming East Germany belongs in the analysis of the stock returns from 1802 (the beginning of Professor Siegels U.S. data), and excluding it would be committing an error of survivorship bias.

Interestingly, one doesnt have to go all the way to communist countries to see that just looking at the United States is a form of survivorship

bias. In Triumph of the Optimists: 101 Years of Global Investment Returns, Elroy Dimson, Paul Marsh, and Mike Staunton argue that most analyses of stock market returns are overly optimistic.3 Most studies, the authors argue, ignore places or time periods where stocks did very poorly. The authors study 16 major countries (the United States plus 15 others including the U.K.) and write that standard analysis has provided investors with a misleadingly favorable impression of long-term equity performance.

The argument of survivorship bias has also been performed rigorously in academic papers. These results suggest that part, but not all, of the advantage of U.S. equities is a result of survivorship bias.4 U.S. stocks have been both lucky and good. It would be naive to expect the future of U.S. stocks to be as bright as the past.

Why Jeremy Siegel Does Not Live in Nuclear Winter without Electricity

Our examination of survivorship bias is worthwhile but incomplete. Students of Eastern philosophy are told, The Zen that can be taught cannot be real Zen. Similarly, the survivorship bias that can be measured cannot be the real survivorship bias. To understand the profound problem in measuring survivorship bias, we can gain perspective from the field of cosmology. This field studies such deep issues as the formation of the universe.

The analysis of survivorship bias in cosmology is motivated by the following observation: Our universe is built with certain basic properties including the speed of light and other parameters that most of us have never heard of such as Plancks constant. Everything in the universe is affected by these parameters. The amazing thing is that scientists have determined that if these basic aspects were even slightly different, then life would be impossible.

Stephen Hawking summarizes this in A Brief History of Time: The

remarkable fact is that the values of these numbers seem to have been finely adjusted to make possible the development of life. 5 One obvious explanation for our good fortune is that God or another intelligent force designed the universe. Scientists have developed the anthropic principle either as an alternative to intelligent design or in order to understand the details of intelligent design. The anthropic principle comes in a weak form and a strong form. Stephen Hawking describes the two versions of the anthropic principle:

The weak anthropic principle states that in a universe that is large or infinite in space and/or time, the conditions necessary for the development of intelligent life will be met only in certain regions that are limited in space and time. The intelligent being in these regions should therefore not be surprised if they observe that their locality in the universe satisfies the conditions that are necessary for their existence. It is a bit like a rich person living in a wealthy neighborhood not seeing any poverty.6

According to the strong anthropic principle,

there are either many different universes or many different regions of a single universe, each with its own initial configuration and, perhaps, with its own set of laws of science. In most of these universes the conditions would not be right for the development of complicated organisms; only in the few universes that are like ours would intelligent beings develop and ask the question, why is the universe the way we see it? The answer is then simple: if it had been different, we would not be here!7

Most efforts to estimate survivorship bias in stocks ask the equivalent of the weak form of the anthropic principle. They test the outcome of an average stock investment around the world, not just the United States. In the case of Hoop Dreams this weak form of survivorship bias requires us