We all make decisions based on available information. It’s hard to blame us! That’s all we have. However, selective presentation of successes can make us believe that things like investments, business plans or opportunities are better than they are. This is called survivorship bias.
Picture: Robert S. Donovan/Flickr
To take a personal example, the internet is littered with stories of the enormous success you can have as a freelancer. What you don’t hear as often (or what we choose to ignore if it doesn’t fit our preferred narrative) is how many people doing the exact same things fail. The result is that we believe success is more common than it is. Consumerism Commentary explains how this phenomenon works in relation to, say, investments:
Mutual fund managers rely on survivorship bias for selling their products. Overall, and over the long term, actively managed mutual funds cannot beat the relevant market benchmark. Considering actively managed mutual funds are more expensive to own than their index counterparts, index-based, non-managed mutual funds are better choices. But mutual fund managers continue to attract investors because they’re able to advertise higher returns.
Money managers can advertise these higher returns overall because poor-performing actively-managed mutual funds are eliminated or merged into other mutual funds. This hides poor performance. As a mutual fund manager, kill the low performers, and when you report performance results for the funds that survive, your track record looks better than it is.
Of course, just because there’s evidence suggesting there’s more failure out there than we see doesn’t make a decision wrong. Someone still had to succeed somewhere. However, it’s always worth asking why. Did they succeed because, statistically, someone was bound to luck into it? Or are there other factors at play?
Want to Fail? Ignore Survivorship Bias. [Consumerism Commentary]