The Little Book of Stupidity: How We Lie to Ourselves and Don't Believe Others by Sia Mohajer

Author:Sia Mohajer [Mohajer, Sia]
Language: eng
Format: epub
Published: 2015-10-06T18:30:00+00:00

Survivorship Bias

Scenario 1: Judy has been thinking of buying some mutual funds. She has met a local broker and is planning on purchasing a US-based mutual fund. The fund is advertised as having a 6–7 percent return for the last six years. The broker shows her a chart illustrating how her capital and monthly contributions will compound into a handsome sum. She is convinced and invests a large portion of her money. The problem is the mutual fund is a skewed representation. Mutual funds operate a number of funds privately and only after solid performance do they open them up to the public. This is known as an incubation period. Funds with unattractive performance are terminated. The advertised 6–7 percent return is not accurate and only represents two of the top funds that did exceptionally well.

Scenario 2: Steve has been trying to start a side business. He has gone to the library and borrowed a couple of reputable older business books. They stress the importance of a solid business plan. Steve works tirelessly on his plan, and after implementing it at great personal cost a year later, he finds it’s basically useless. His product isn’t in demand and his marketing methods are all wrong. The problem is that the world has changed since those books were written and the principles in those old books won’t work in his industry.

“History is written by the victors.”

Winston Churchill

We love winners. Winning is awesome. Winning is hard though and it's a lot of work. What is the next best thing to winning? Listening to stories about winning. Welcome to the survivorship bias. This bias occurs when people focus on the success stories of people or things that survived a difficult event instead of looking at those that didn't do quite so well. The survivors are praised and a number of accurate as well as very inaccurate conclusions are placed upon their success. The result is an overly optimistic belief that those people or things hold a magical key to achieving the same level of success.

The problem with this bias is that we ignore the failures and as a result, we ignore valuable insights. We see this bias in education, finance, medicine, law and in the military.

Thank you, Mr. Wald

I'm sure most of you haven't heard of Abraham Wald. I hadn't either, but he saved a lot of lives using everyone's favorite subject—math. Wald, a statistician, used the idea of survivorship bias to minimize bomber losses to enemy fire. A study conducted at the Center for Naval Analyses 29 recommended that armour be added to areas of bomber planes that received the most damage. After putting in some good ol’ detective work, Wald decided that since the bombers survived the missions, the armour must already be sufficient. Instead, he decided to add armour to the previously unarmoured areas.

Using some pretty complicated math, he convinced the top military brass that his theory was right. The result was a huge reduction in bombers being shot down. The

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