Survivor Bias and Why Business Books Suck
In a recent investor meeting, I was reminded about the topic of survivor bias when the investor reeled off the successful investments they've made over the years. What he didn't mention, were the ones that fell off a cliff.
Survivor bias is making a decision based on only one side of the facts. A famous case and perhaps the original source of 'survivor bias' is from world war two, when aircraft that came back from missions were reinforced where the damage was most concentrated.
During World War II, the statistician Abraham Wald took survivorship bias into his calculations when considering how to minimize bomber losses to enemy fire. Researchers from the Center for Naval Analyses had conducted a study of the damage done to aircraft that had returned from missions, and had recommended that armor be added to the areas that showed the most damage. Wald noted that the study only considered the aircraft that had survived their missions—the bombers that had been shot down were not present for the damage assessment.
The holes in the returning aircraft, then, represented areas where a bomber could take damage and still return home safely. Wald proposed that the Navy reinforce areas where the returning aircraft were unscathed. Since those were the areas that, if hit, would cause the plane to be lost. His work is considered seminal in the then-nascent discipline of operational research.
Self help and business books are another area that suffer badly from survivor bias. Books are generally written by the few winners, telling stories of how they made it. What you don't hear is from the many hundreds of losers and where they failed.
With investors there is a general rule of thumb that out of 10 investments, 7 go 'belly up', 2 return their money and 1 does really well. That's if they're lucky! [Jason]