On Survivorship Bias In Business

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.

Aspect	Explanation
Definition	Survivorship Bias is a cognitive bias that occurs when we focus on the success stories or survivors of a particular event or process and overlook those that failed or did not survive. This bias can lead to a skewed perception of reality because it neglects important information about failures and can distort decision-making, especially in areas like business, investing, and historical analysis. Survivorship bias can create the illusion that a particular outcome is more achievable than it actually is, as it selectively highlights survivors’ experiences and characteristics while ignoring those who did not succeed.
Key Concepts	– Selective Focus: Survivorship bias involves selectively focusing on successful outcomes while neglecting failures. – Incomplete Data: It arises from incomplete data that does not include the full range of outcomes. – Misleading Conclusions: It can lead to incorrect conclusions and decisions based on incomplete information. – Common in Analyses: Survivorship bias is common in historical analyses, investment strategies, and success stories in various fields.
Characteristics	– Focus on Survivors: Survivorship bias emphasizes the experiences and characteristics of those who succeeded. – Neglect of Failures: It neglects the experiences and lessons learned from individuals or entities that did not succeed. – Distorted Perceptions: It can distort perceptions of success rates and probabilities. – Misleading Insights: Conclusions drawn from survivorship-biased data can be misleading and overly optimistic.
Implications	– Overconfidence: It can lead to overconfidence in the achievability of certain outcomes. – Poor Decision-Making: Decision-makers may make poor choices based on incomplete and biased information. – Investment Risks: In investing, it can lead to underestimating risks and overestimating potential returns. – Historical Analyses: Survivorship bias can distort historical analyses, leading to inaccurate narratives. – Learning from Failure: Neglecting failures means missing opportunities to learn and improve.
Advantages	Survivorship bias does not offer advantages per se; rather, it is a cognitive bias to be aware of and mitigate in decision-making and analysis. Recognizing this bias allows individuals and organizations to make more informed and balanced decisions.
Drawbacks	– Misleading Insights: The primary drawback is that survivorship bias can lead to misleading insights and poor decision-making. – Overconfidence: Overestimating the likelihood of success can lead to overconfidence. – Incomplete Understanding: It provides an incomplete understanding of the factors contributing to success or failure. – Risk Assessment: It can result in inaccurate risk assessments and resource allocation.
Applications	Survivorship bias is relevant in various domains, including finance, entrepreneurship, historical research, and data analysis. It is crucial to consider when analyzing historical data, evaluating investment opportunities, and making strategic decisions.
Use Cases	– Investment: In investment, focusing on past successful stocks without considering the broader universe can lead to poor investment decisions. – Entrepreneurship: Entrepreneurs may be influenced by survivorship bias when they primarily study success stories, overlooking the challenges faced by failed startups. – Historical Analyses: Historians and researchers must account for survivorship bias when studying historical events or figures, ensuring a balanced perspective. – Data Analysis: Data scientists and analysts need to be cautious about survivorship bias when working with incomplete datasets.

Table of Contents

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.

Survivorship bias and outcome bias

There is a connection between survivorship bias and outcome bias, where events are judged based on their scorecard without understanding that the outcome might have been skewed by factors unrelated to the final outcome.

One example of that is how for one successful Jeff Bezos, there have been thousands or millions of Jeff Bezos-like individuals that not only didn’t achieve the level of greatness of Bezos but actually miserably failed.

Thus, when taking into account incredible outcomes, it’s also critical to balance them out by understanding the survivorship bias in action.

By selecting as your sample the people that have survived, sure, there might be some signal there, but the greater the success, the greater also the luck/random factor, which is hard to eliminate from the outcome.

Outcome bias and survivorship bias, combined, might fool us into believing in a linear world mindset, where we think that habits or thoughts will automatically transform into outcomes and successes.

While it’s fine to be fooled by those things, in the short-term, if they do lead to action (let’s say you fall into the trap of believing you can be as successful as Jeff Bezos, yet that leads you toward building a business for yourself) it’s also critical to acknowledge them in the long-term.

Indeed, let’s say you started a business by naively assuming you could revolutionize a whole industry.

As you build the business, you realize that it wasn’t as simple as you imagined, quite the opposite.

And you fail. Yet, now you have experience, which you can turn into your own understanding of the world, rather than trying to emulate success cases that might be completely off compared to where you are right now.

Cherry-picking and survivorship bias

Another tendency related to the survivorship bias is that of picking only what we think is useful to prove our point.

Once again, if cherry-picking leads toward doing things that we otherwise would not have done, then it’s a great short-term propeller.

Yet, over time, it’s critical to transform that naivety into business acumen!

Heuristic and mental models

For the sake of the above, it’s important to develop your own understanding of the world through a set of heuristics that can drive you in making decisions in an uncertain, opaque business world!

Examples and Case Studies

Stock Market Success Stories: In the stock market, people often celebrate the success stories of investors who made significant gains on certain stocks. However, this overlooks the vast number of investors who lost money on other stocks or the market as a whole. Those who made successful bets on individual stocks may have experienced survivorship bias, leading them to believe they have special skills in picking winning stocks.
Business Case Studies: When studying successful businesses, such as Apple or Google, it’s crucial to acknowledge survivorship bias. For every Apple or Google, there are many other startups and companies that failed to achieve the same level of success. It’s essential to consider the factors that contributed to their success and also examine the factors that led to the failure of other companies.
Entrepreneurial Narratives: Entrepreneurial success stories are often glorified in media and popular culture. People may be inspired by stories of entrepreneurs who started from nothing and achieved massive success. However, these stories may not represent the reality for the majority of entrepreneurs, as many startups fail within the first few years of operation.
Investment Strategies: Some investment strategies, such as value investing, rely on finding undervalued stocks and betting on their long-term success. However, investors should be aware of survivorship bias in evaluating past performance. The successful stocks that fit the strategy are highlighted, while the unsuccessful ones are ignored.
Historical Analysis: When analyzing historical events or trends, survivorship bias can influence our understanding. For example, when studying the success of certain military strategies in wars, we may only focus on the victories and overlook the strategies that failed or led to defeat.
Personal Decision-Making: In personal decision-making, survivorship bias can lead people to make decisions based on the success stories they have heard or seen. For example, someone may start a business or invest in a particular market because they heard about others who succeeded in the same field, without fully understanding the risks and challenges involved.

Case Studies

Survivorship Bias in Music: Celebrating legendary bands and musicians from the past while forgetting about the countless bands that never gained recognition or disbanded due to lack of success.
Survivorship Bias in Aviation: Focusing on famous pilots like Amelia Earhart or Charles Lindbergh who successfully completed historic flights, while ignoring the pilots who disappeared or crashed during similar endeavors.
Survivorship Bias in Celebrity Marriages: Highlighting long-lasting celebrity marriages as relationship goals, while disregarding the high divorce rates among celebrities.
Survivorship Bias in Innovation: Studying successful inventions and innovations like the light bulb or the iPhone and overlooking the numerous failed prototypes and ideas that never made it to market.
Survivorship Bias in Literature: Celebrating classic literature and renowned authors while forgetting the vast number of writers who struggled to get published or remained obscure.
Survivorship Bias in Social Movements: Focusing on the leaders and figures of successful social movements (e.g., Martin Luther King Jr. in the civil rights movement) while neglecting the contributions of countless activists who worked behind the scenes.
Survivorship Bias in Weight Loss: Promoting weight loss success stories and transformation journeys on social media while not considering the many individuals who struggle with weight loss and face setbacks.
Survivorship Bias in Education: Highlighting the achievements of Ivy League graduates and successful entrepreneurs who dropped out of college while overlooking those who attended prestigious universities but didn’t achieve extraordinary success.
Survivorship Bias in the Film Industry: Celebrating Oscar-winning actors and directors while forgetting the multitude of aspiring actors and filmmakers who never gained recognition.
Survivorship Bias in Startups: Showcasing unicorns (startups valued at over $1 billion) and their founders while not acknowledging the high failure rate and challenges faced by most startups.
Survivorship Bias in Health and Fitness: Promoting fitness programs endorsed by athletes with exceptional physiques while neglecting individual variations and the hard work of many who don’t achieve similar results.
Survivorship Bias in Personal Finance: Following investment strategies of individuals who became millionaires through unconventional means (e.g., cryptocurrency) without considering the risks and losses faced by others.
Survivorship Bias in Scientific Discoveries: Celebrating groundbreaking scientific discoveries and Nobel laureates while disregarding the countless experiments and research endeavors that didn’t yield significant results.
Survivorship Bias in Real Estate: Showcasing real estate investors who amassed substantial wealth through property investments while ignoring those who faced foreclosure or financial setbacks.
Survivorship Bias in Fitness Equipment: Promoting exercise equipment endorsed by athletes while not considering the unused gym memberships and home fitness equipment that gather dust.

More examples:

Investment Success Stories: Celebrating individuals who made significant profits in the stock market, like Warren Buffett or Elon Musk, while ignoring the countless investors who incurred losses.
Entrepreneurial Success Narratives: Glorifying stories of successful entrepreneurs, such as Steve Jobs or Jeff Bezos, without acknowledging the many startups that failed or struggled.
Historical Military Strategies: Focusing on victorious military strategies in history and overlooking failed tactics or battles that resulted in defeat.
Surviving Pandemics: Highlighting individuals who survived pandemics or serious illnesses and attributing their survival solely to personal factors, disregarding those who succumbed.
Survivorship Bias in Music and Arts: Celebrating famous artists and musicians while forgetting the countless talented individuals who never achieved recognition during their lifetimes.
Sports Legends: Celebrating sports legends who achieved fame and fortune while ignoring the countless athletes who didn’t make it to the professional level or had short-lived careers.
Business Case Studies: Analyzing successful companies like Apple, Google, or Amazon and attributing their success to specific strategies without considering the many failed businesses that employed similar approaches.
Academic Achievements: Focusing on individuals who excelled academically and attributing their success to intelligence or hard work, while disregarding those who faced challenges or had different learning styles.
Survivorship Bias in Social Media: Showcasing people who achieved popularity or success on social media platforms, like Instagram influencers, without acknowledging the vast majority who struggle to gain followers and engagement.
Survival of Species: Discussing the survival of certain endangered species while overlooking those that went extinct due to habitat loss or other factors.
Career Advice and Role Models: Promoting successful professionals as role models and suggesting that following their career paths guarantees success, without considering individual circumstances and luck.
Financial Gurus: Following financial advice from self-proclaimed gurus who claim to have made a fortune in a specific way, without considering that their success might be an outcome of survivorship bias.
Surviving Natural Disasters: Focusing on people who survived natural disasters and attributing their survival to preparation or resilience, while not considering those who faced unfortunate outcomes.
Survivorship Bias in Artifacts: Studying ancient artifacts and structures that have survived over centuries, often overlooking those that deteriorated or were destroyed.
Athletic Training Programs: Promoting training programs based on the routines of successful athletes, without considering individual differences, genetics, and the many who didn’t achieve similar results.

Key takeaways

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!

Framework Name	Description	When to Apply
Survivorship Bias	– Refers to the tendency to focus on survivors or successful outcomes while overlooking failures or non-survivors, leading to skewed perceptions, biased conclusions, and flawed decision-making.	– When analyzing historical data or success stories, to be mindful of survivorship bias by considering the impact of missing data or unobserved failures, fostering a more accurate and balanced understanding of outcomes and informing more robust decision-making processes.
Data Analysis	– Involves examining and interpreting data to uncover patterns, trends, or insights, suggesting that survivorship bias can distort data analysis by selectively focusing on available data points while overlooking missing or unobserved data.	– When conducting data analysis or research, to address survivorship bias by considering the limitations and biases inherent in available data, employing robust statistical methods, and acknowledging the potential impact of missing or unobserved data on analysis outcomes.
Historical Analysis	– Encompasses examining past events or trends to derive lessons or insights, suggesting that survivorship bias can distort historical analysis by focusing on successful outcomes or survivors while neglecting failures or non-survivors.	– When studying historical events or trends, to account for survivorship bias by considering the influence of missing data or unobserved failures, fostering a more nuanced and accurate understanding of historical contexts and informing more informed decision-making.
Decision-Making	– Involves evaluating options and making choices based on available information or past experiences, suggesting that survivorship bias can influence decision-making by leading to overestimation of success probabilities or underestimation of risks.	– When making decisions or evaluating strategies, to mitigate survivorship bias by considering the influence of unobserved failures or non-survivors, conducting scenario analysis, and seeking diverse perspectives to foster more robust and informed decision-making processes.
Risk Management	– Encompasses identifying, assessing, and mitigating risks to minimize potential negative impacts on objectives or outcomes, suggesting that survivorship bias can lead to underestimation of risks or vulnerabilities by overlooking past failures or non-survivors.	– When managing risks or uncertainties, to address survivorship bias by considering the impact of missing data or unobserved failures on risk assessments, conducting thorough risk analysis, and implementing mitigation strategies to enhance resilience and preparedness.
Learning from Failure	– Involves extracting lessons or insights from past failures or setbacks to improve future performance or decision-making, suggesting that survivorship bias can hinder learning from failure by overlooking unsuccessful outcomes or missed opportunities.	– When reflecting on past experiences or failures, to mitigate survivorship bias by actively seeking insights from both successes and failures, encouraging open discussion, and fostering a culture of learning and resilience that embraces the full spectrum of outcomes.
Sampling Bias	– Refers to the distortion in data analysis resulting from non-random sampling methods, suggesting that survivorship bias can contribute to sampling bias by selectively including or excluding certain data points based on their outcomes or characteristics.	– When conducting research or analysis, to address survivorship bias by being mindful of sampling bias and employing random sampling methods, representative sampling techniques, or sensitivity analyses to mitigate the impact of survivorship bias on data analysis outcomes.
Narrative Fallacy	– Involves the tendency to construct narratives or explanations based on limited or biased evidence, suggesting that survivorship bias can contribute to narrative fallacy by selectively highlighting successful outcomes or cherry-picking examples that support a particular narrative.	– When constructing narratives or explanations, to be cautious of survivorship bias by considering the influence of missing data or unobserved failures, fostering skepticism, and seeking diverse perspectives to develop more balanced and evidence-based narratives.
Diverse Perspectives	– Encompasses seeking input or insights from a variety of sources or viewpoints to enhance decision-making or problem-solving, suggesting that survivorship bias can be mitigated by considering diverse perspectives that include both successes and failures.	– When evaluating options or analyzing outcomes, to mitigate survivorship bias by seeking input from diverse stakeholders, encouraging dissenting opinions, and fostering a culture of inclusivity that values a range of perspectives to inform more comprehensive and robust decision-making processes.