What is Survivorship Bias & How to Prevent it

Survivorship bias, a common logical error, skews our perception by focusing solely on the ‘survivors’ or success stories while overlooking those that didn’t make it. This bias can lead to misinterpretations of reality, hindering effective decision-making. In this blog, we will unravel the concept of survivorship bias and present strategies to prevent it.

What is Survivorship Bias?

One can define survivorship bias as ‘’Survivorship bias is a cognitive bias that occurs when one focuses on the individuals or things that have “survived” or succeeded in a particular situation while overlooking those that did not.’’

It involves drawing conclusions or making judgments based on a limited sample that has passed through a specific selection process, ignoring the larger pool of data that may include failures or non-survivors.

The term originated during World War II when analysts studied the damage on aircraft that returned from missions. They primarily examined the planes that had survived and made it back, neglecting the ones that were shot down. This led to skewed insights and misguided decisions.

What is Reverse Survivorship?

Reverse survivorship bias, also known as survivorship neglect or failure to consider non-survivors, is the opposite of survivorship bias. While survivorship bias focuses on the successes or survivors, reverse survivorship bias occurs when one primarily considers the failures or non-survivors while overlooking the successes or survivors.

For example, in investment analysis, reverse survivorship bias would involve primarily studying failed investments and disregarding successful ones. This could lead to a pessimistic outlook, missed opportunities, and an inability to learn from successful investment strategies.

What are Survivorship Bias Hedge Funds?

Survivorship bias in the context of hedge funds refers to the tendency to focus on the performance of existing or active hedge funds while disregarding those that have failed or shut down. It occurs because historical performance data typically exclude hedge funds that have ceased operations, leading to an incomplete view of the industry’s overall performance.

Why Does Survivorship Bias Matter?

Survivorship bias matters because it can distort our perception of reality and lead to flawed decision-making. Here are a few key reasons why it is important to be aware of and mitigate survivorship bias:

Distorted Understanding

Survivorship bias can create a skewed view of success and failure. By focusing only on the survivors or successes, we may develop unrealistic expectations or believe that certain paths or strategies are guaranteed to lead to success. This can result in poor judgment and misguided actions.

Incomplete Analysis

Ignoring the non-survivors or failures can prevent us from analysing the full range of factors that contribute to outcomes. By disregarding this valuable information, we miss important insights and may fail to identify potential risks, pitfalls, or patterns that could inform our decisions.

Unrealistic Comparisons

Survivorship bias can lead to unfair comparisons or benchmarks. By solely examining the best performers, we may set unrealistic standards for ourselves or others. This can create unnecessary pressure, demotivation, or a skewed perception of what constitutes success.

Limited Innovation

Focusing only on success stories can stifle innovation and creativity. By failing to analyse and learn from failures, we miss opportunities for improvement and may perpetuate existing approaches without exploring alternatives.

To make well-informed decisions and develop a more comprehensive understanding of success and failure, it is crucial to recognise survivorship bias and actively seek out a broader perspective that includes both survivors and non-survivors. By doing so, we can gain a more realistic and nuanced view of the factors that contribute to outcomes and make more informed choices.

What are Some Examples of Survivorship Bias?

Survivorship bias can be observed in various domains. Survivorship bias in finance refers to the tendency to focus on the performance of successful or surviving financial assets, strategies, or investment opportunities while neglecting the ones that did not succeed or were discontinued. An example of Survivorship bias finance is:

How to Avoid Survivorship Bias?

How To Overcome Survivorship Bias? To overcome survivorship bias, it is essential to adopt a more comprehensive and balanced approach to data analysis and decision-making. Here are some strategies to mitigate the impact of survivorship bias:

Seek Out a Diverse Range of Data

Actively look for and consider data that includes both successful and unsuccessful outcomes. By analysing the full spectrum of results, you gain a more realistic understanding of the factors contributing to success or failure.

Study Failure Cases

Pay attention to failures and non-survivors. Examine the reasons behind their lack of success and identify potential pitfalls or patterns that can inform your decision-making process. Learning from failures can be just as valuable as studying successes.

Use a Larger Sample Size

Expand your dataset by including a larger sample size. By considering a broader range of cases, you reduce the likelihood of drawing conclusions based on outliers or exceptional circumstances.

Conduct a Retrospective Analysis

Look back at historical data or past decisions and evaluate the entire dataset, not just the outcomes that survived or succeeded. This can help uncover biases or assumptions that may have influenced your previous judgments.

Consider Multiple Perspectives

Seek diverse opinions and viewpoints from experts, peers, or advisors. By engaging in discussions and considering different perspectives, you gain a more well-rounded understanding of the subject.

Conduct Robust Research and Analysis

Ensure that your research methods are rigorous and comprehensive. Use statistical analysis, conduct randomised studies, and consider the limitations and potential biases in your data collection process.

Maintain a Critical Mindset

Approach information and narratives with a critical mindset. Question assumptions, seek evidence, and consider alternative explanations. Avoid accepting claims at face value without examining the underlying data.

Focus on the Process, Not Just the Outcome

Place emphasis on the decision-making process rather than solely focusing on the outcomes. Assess the rationale, analysis, and factors considered during the decision-making process to understand the quality of decision-making, regardless of the final outcome.

By consciously incorporating these strategies, you can reduce the impact of survivorship bias and make more informed decisions based on a more comprehensive understanding of the data and outcomes.

Frequently Asked Questions