W.I.T. #42 - Understanding Survivorship Bias
Survivorship Bias clouds our judgment by limiting our perspective to just one side of an equation leading us to draw inaccurate conclusions.
Three Things Worth Sharing
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VIDEO TRANSCRIPT:
John Scherer:
John: What is survivorship bias and how can we avoid that in our decision making? That's what I'm thinking about. I was recently reading a newsletter that I subscribed to from a guy named Sahil Bloom. We'll put a link to his information in the show Notes. He's got some really thought provoking articles that come out, and this one talked about survivorship bias. And he told a story about the US. Military, how in World War II, they were analyzing the planes that had come back from their missions and had been shot up, but had made it back to the base. And they took a look, and here's a picture of what they had mapped out as far as look at the damage that was being done to these planes. And they said, hey, listen, let's reinforce the planes in these areas because that's where all the damage is being done, right? And fortunately, somebody had figured out, hey, wait a minute, these are the planes that made it back, and they can survive damage in these areas. John: Which is really interesting to me as you take a look at that, the wings and the tail, but the cockpit being shot up like that and being able to survive that, that was interesting. But, hey, these things can survive these. We don't know about the planes that went down, but it looks kind of like from this that maybe if planes get shot in the engines in the front or in the fuselage in the back, that those are the ones that don't make it. So they ended up putting the reinforcements in those places that aren't shot up on this picture here, assuming that those would cause damage that would cause a plane to crash, and they did significantly increase the safety of the planes. And so it's really interesting looking at this idea of survivorship bias, and you see these things that have been the winners, and you assume that we need to address something with those. We talked about this in a recent edition of What I'm Thinking. We'll put a link again in the Show Notes. We talked about mutual fund analysis and how all the data on mutual funds ignores the ones that went away. John: It just talks about the survivors. Hey, what about the ones that didn't make it? The ones that didn't make it certainly have some information and maybe more information than the ones that did make it, just like in the airplanes, right? In the article Bloom goes on, he talks about how this maybe impacts us in other ways in our life. You look at here's somebody who had this trait and they were successful, or they did this thing and they were successful. And we assume that, hey, we should follow those traits or those things. But it doesn't talk about what about all the other people that maybe had those same traits or did those same things and they didn't lose the weight, they weren't successful in business. They didn't do those things, even though they did those same things. We look at the winners and we assume that that represents the whole, and that's a real flaw in our thinking. As I was preparing for this episode, I came across another newsletter that I was subscribing to and they had this quote from Carl Sagan. John: Take a look through that for a know, we think about this and we sort of read that at first glance and take it for granted. It was just funny that I was thinking about survivorship biases looking at that, saying, hey, they laughed at the Wright brothers, they laughed at Columbus, and yet they did good things, right? But also, hey, what about all the people they didn't laugh at or that they laughed at and didn't do great things? Right? So just because people laugh at you doesn't mean you're not a genius, but it also doesn't mean you're not a clown, right? So as we think about this and think about what's the information we have, is it the entire data set? Do we need to think about those about more than what's in that picture in front of us can be really helpful in our decision making going forward. So that's what I'm thinking about today. Hopefully let me know what you're thinking about. I'm always interested in that. If you're watching this on YouTube, join the comment in the comment box or shoot me an email directly. And as always, thanks for watching.
John Scherer CFP® is a fee-only certified financial planner based in Middleton, Wisconsin. John has over 20 years of experience advising clients on personal tax, investment, and financial planning. You can reach him by email at john@trinfin.com.