Survivorship bias is a pervasive fallacy that exists in business, where people focus on the few survived players, in any given market, without realizing that most initial players in that given market are dead, or went into oblivion. In short, survivorship bias transforms the past into a linear story, by removing uncertainty from it.
Understanding survivorship bias
When I saw this on Twitter, I had to comment on it!
It is true that when you take a very long-term view (at least 10-15 years) of markets, it’s easy to argue that you’ll win.
But that misses a few key points about how the real world works:
1. When we analyze the past, the survivorship bias is extreme.
We tend to see only the very few players that made it when most initial players were either wiped out, bought at a discount, or went into oblivion.
2. Markets might rebound in the very long term. But they also might not.
In short, during the dot-com bubble, Amazon crashed by more than 90%, and yet, it took Amazon the stock made it back to new all-time highs by late 2009, all the while the company faced tough times.
The crisis eventually changed the business playbook, yet survival was not a guarantee!
3. When markets turn bad, priorities change.
When there is a lot of liquidity, investors prioritize growth at all costs.
When markets turn red, they look for profit margins and viable business models.
Therefore, having the runaway, to stand for at least a few quarters, becomes critical, and cutting the unnecessary costs becomes key.
4. Many failures during market downturns don’t mean they were terrible ideas.
In many cases, they simply had the wrong timing or execution strategy.
Take how companies like Webvan (grocery online) failed miserably, and yet how, today, this is one of the hottest industries around.
5. Over time, especially in the tech world, things tend to consolidate in the hands of a few winners.
Picking them up is like winning the lottery.
Imagine a game where you start with a thousand potential winners, but after ten years, you only have 3-5.
You might have been correct in guessing the Internet was the future, and yet you might have missed it, in terms of investing, altogether.
In short, placing bets on the future isn’t an easy game. I wish all it took were a long-term perspective.
6. A long-term perspective does help, indeed!
As markets are mostly tied to liquidity and macroeconomics in short.
On the other hand, they align (or at least the chances to align) with fundamentals in the long term.
7. As a business person, you want to focus on building valuable stuff.
So whether markets go up or down is relatively significant.
Of course, it matters because you might be navigating in stormy waters if you need funding.
And in addition, revenues and profitability might slow down independently of how good is the product.
But this is also an opportunity to reduce the noise and focus on what works.
Indeed, there is much less noise during downturns, and builders can concentrate on the product.
- There is a spread survivorship bias when looking at business history, which focuses on the very few survived companies. Looking back, it was apparent they were supposed to thrive. Yet, placing a bet on those companies back in the day was as tricky as an understanding today which companies are worth betting on! Things look linear and straightforward only in hindsight.
- The survivorship bias is very pervasive, and it starts from the assumption that if you were to hold your position for long enough, you would get rewarded. Yet while this might be true in some cases, many other companies cease to exist altogether when a crisis strike.
- Downturns are great opportunities to revise a business playbook, shift focus on product, and build valuable stuff. Noise reduction in downturns is incredible, and this becomes the best time to make valuable stuff!
Keep these things in mind!
With ♥️ Gennaro, FourWeekMBA
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