The Hidden Truth: Why Survivorship Bias Warps Our View of Success - 2021-02-27

Have you ever wondered why some industries seem far more successful than they actually are? Or why certain strategies appear foolproof when they often lead to failure? The culprit might be survivorship bias, a cognitive bias that distorts our perception by focusing only on successes while ignoring failures.

This bias isn't just a theoretical concept; it has real-world consequences. During World War II, statistician Abraham Wald tackled this problem head-on while advising the US military on how to minimize bomber losses. The military examined returning aircraft, noting the areas with the most bullet holes, and logically concluded that these areas needed more armor. But Wald disagreed. He realized they were only looking at the surviving planes. The planes that were shot down and lost were, well, lost – and therefore couldn't be examined. The bullet holes on returning planes showed where a bomber could be hit and still survive. Wald's insight was revolutionary: reinforce the unscathed areas. Those were the vulnerable spots; a hit there would likely bring the plane down. His work became foundational in the field of operational research.

Another example comes from World War I. When the Brodie helmet was introduced, there was a sudden spike in severe head injury admissions to field hospitals. The army considered withdrawing the helmet, but a statistician pointed out the flaw in their thinking. Previously, soldiers who sustained certain head injuries were likely killed instantly. Now, thanks to the helmet, they were surviving those hits and making it to the hospital. The apparent increase in head injuries was actually a sign of the helmet's effectiveness!

Survivorship bias also plagues the investment world. You might have heard the Chinese saying: "Seven losses, two draws, one win" to describe stock market investing. But this can be incredibly misleading. Think about it: if someone makes a killing in the stock market, are they likely to shout it from the rooftops? Maybe not. Some people are private about their finances. Others might fear being asked for loans. And some, like my friend who made millions but then "only" made millions later, might downplay their success because they're chasing even bigger wins. They might even want to protect their business by discouraging new competitors. As Mr. Lim pointed out, an industry with a few known players can deter new entrants, while a seemingly monopolistic market can attract unwanted competition.

This bias can also lead us to misjudge people's situations. Remember the story of the man who returned to his Chinese hometown and spent lavishly? It created the impression that life in America was incredibly lucrative. But the truth was far different. After his trip, he went back to the US and lived in a cheap basement apartment, continuing his dishwashing job. His brief display of wealth painted a false picture, encouraging others to follow in his footsteps, only to face a harsh reality. While the internet has made it harder for such myths to persist, the underlying bias remains.

Even I'm guilty of it. I don't readily share my investment experiences with everyone because not everyone is suited for it. It requires time, dedication, and a willingness to learn. If I tell someone they can make easy money, and they treat the stock market like a casino without doing their research, I'd be doing them a disservice. Wise people don't just give advice; they share the why behind it. If someone isn't willing to learn, at least they won't lose money because of my advice. And even if I recommend a stock that I truly believe in, the timeframe for it to pay off could be a decade or more. Survivorship bias reminds us that what we see and hear isn't always the full story. We need to be critical, ask questions, and look beyond the surface to avoid being misled.