The anecdote of a friend or acquaintance who made a fortune on a particular investment is one of the most compelling and least reliable inputs to investment decision-making. Its compellingness derives from the social proof it provides and the vividness of the specific example; its unreliability derives from the fact that it is a single data point drawn from a population whose full distribution the investor never sees. The friend who made a fortune on a particular cryptocurrency, a specific stock, or a particular real estate investment is not representative of all investors in the same asset; he is a selected example drawn from a population that includes many who lost money on the same investment, none of whom are circulating their outcomes as evidence of the investment's merit.
The availability heuristic gives this kind of anecdote disproportionate weight in the investor's assessment of the investment's prospects. The specific, vivid, personally connected story of a friend's success is cognitively more accessible than the abstract statistics about the investment's typical outcomes across all its holders. The friend's fortune is memorable, emotionally engaging, and socially connected; the distribution of returns across all participants is abstract, impersonal, and not readily accessible from ordinary social information. The result is an assessment of the investment's prospects that is systematically skewed toward the positive outcome that was observed, ignoring the distribution of outcomes that the observed example represents.
The social dynamics compound the problem. When a friend has made a fortune on an investment, the investor's relationship with that friend creates additional pressure to take the information seriously. To dismiss the friend's experience as unrepresentative feels like a rejection of the friend's judgment, a form of intellectual arrogance that social relationships do not easily accommodate. The investor who critically evaluates the anecdote—who says "your experience is consistent with luck rather than with the investment's typical outcomes"—is making a socially costly statement that most investors are reluctant to make even in their own minds, let alone aloud.
The specific danger of the friend-made-a-fortune anecdote is its timing. The anecdote is generated when the investment has already appreciated—the friend is reporting a fortune that has been made, not a fortune that might be made. The investor who acts on this information is buying after the appreciation has occurred, at a price that reflects the gains the friend has already realised. The friend's fortune was made by others, not by the investor acting on the anecdote; and if the appreciation was driven by the same social diffusion that produced the anecdote, the investor is arriving at precisely the moment when the momentum driving the appreciation is most likely to reverse.
The corrective is the explicit recognition that anecdotes are not data in the relevant sense—they are individual observations that may or may not be representative of the population of outcomes the investment typically produces. The appropriate response to a compelling anecdote is not to dismiss it but to seek the distributional information that contextualises it: what fraction of investors in this asset class, over what periods, have produced comparable outcomes? What are the typical outcomes, including the losses? Only when this distributional information is available can the anecdote be properly weighted—as one observation from a distribution whose full shape the investor needs to understand before making a commitment.