Understanding Survivorship Bias: A Mental Model for Better Decision-Making
What is Survivorship Bias?
Survivorship bias is a cognitive error that occurs when we focus only on the successes or "survivors" of a process while ignoring those that failed. This mental shortcut can lead to distorted conclusions because the failures, which often hold critical insights, are excluded from our analysis. By focusing solely on the visible successes, we risk overestimating the likelihood of success and misunderstanding the factors that contribute to it.
The term gained prominence during World War II when statistician Abraham Wald analyzed aircraft returning from combat. Military engineers initially wanted to reinforce the parts of planes that showed the most bullet holes. However, Wald pointed out that these planes survived despite being hit in those areas. The planes that didn’t return likely had critical damage in areas not observed on the survivors. This insight led to reinforcing the less-damaged areas, ultimately saving countless lives.
Why Does Survivorship Bias Matter?
Survivorship bias skews our perception of reality by presenting an incomplete picture. It can lead to flawed decision-making in various fields, including business, education, and personal growth. For example, when studying successful entrepreneurs, we often hear about their grit and innovative ideas but rarely about the thousands of others who failed despite possessing similar qualities. This selective attention can create an illusion that success is more attainable than it actually is.
By recognizing survivorship bias, we can make more informed decisions by accounting for both successes and failures. This approach helps us identify patterns and factors that genuinely contribute to outcomes rather than relying on incomplete data.
How to Apply Survivorship Bias in Your Thinking
To avoid falling into the trap of survivorship bias, consider these steps:
- Seek out missing data: Actively look for examples of failures or non-survivors in any analysis. For instance, if you're studying successful businesses, also examine those that failed to understand what went wrong.
- Question visible success: Ask yourself whether the attributes of successful cases are truly unique or if they exist among failures as well.
- Adopt a holistic perspective: Broaden your scope by including all relevant data points, not just those that are readily available or visible.
- Learn from failure: Failures often provide valuable lessons about risks and pitfalls that successes may not reveal.
An Example: Survivorship Bias in Investing
Imagine you’re evaluating mutual funds to invest in. You notice that several funds have delivered outstanding returns over the past decade. It’s tempting to conclude that these funds are managed by exceptional teams with winning strategies. However, this conclusion ignores survivorship bias.
The funds you see are survivors—they performed well enough to remain in operation. What about the funds that closed due to poor performance? By excluding these failures from your analysis, you might overestimate your chances of picking a winning fund. To counteract this bias, investigate historical data on all funds, including those no longer active. This broader perspective will help you identify consistent patterns and make better investment decisions.
The Takeaway
Survivorship bias is a powerful mental model that reminds us of the importance of considering both successes and failures when analyzing outcomes. By recognizing this bias and actively seeking out missing data, we can improve our decision-making processes and avoid misleading conclusions. Whether you’re evaluating business strategies, career paths, or personal goals, remember: true wisdom comes from understanding the full picture—not just the part that survived.