Understanding the Survivor Bias and its Affect on your Business Decisions
Imagine you are in the military during WW1. For the first time in history, airplanes are being deployed for military purposes on a large scale, and you are tasked with improving the survival rates of pilots and planes under fire. You decide that the best approach is to examine returning planes, identify the areas with the most bullet holes, and reinforce those areas.
This approach was followed by the military until a mathematician named Abraham Wald realized its error. The returning planes had been hit in areas that didn't negatively affect the pilot or their ability to return home. Abraham proposed, correctly, that the planes that returned needed reinforcement in the areas that were not hit by enemy bullets to improve their chances of a successful return.
What we see at work here is survivor bias. In short, by focusing only on successes, we fail to learn what caused others to fail.
Survivor bias is prevalent in business in several ways, and some significant companies failed to consider it, to their great detriment (hello Blockbuster, Kodak, Toys "R" Us…).
When it comes to entrepreneurship and survivor bias, there are a few important things to consider.
The "Overnight Success"
First, the notion of "overnight success." You've heard the tales – the friend of a friend who invented something simple, shared a YouTube video, and was raking in millions less than a year later. A common variation is the "garage company" that goes from tinkering in the garage to becoming a billion-dollar unicorn overnight.
These stories can be found everywhere, but there isn't much to learn from them. They aren't realistic for most entrepreneurs and, in fact, lead people to make poor decisions based on inappropriate expectations. An entrepreneur would be much better served by learning why someone with a similar idea, product, or service failed and designing their company to overcome those obstacles.
For example, let's say you want to start a short-term vacation rental property. If you search on social media, you'll find numerous people who (supposedly) started with nothing and made six figures in the first year with short-term rentals. That's great, but their very specific circumstances may have led them to quick success.
However, in preparing for your new venture, you'd be better served by researching people in your area who failed. What lessons did they learn that you could apply? Did they fail to account for higher-than-anticipated property taxes and insurance? Did they underestimate the effects of seasonality? Did they forget to factor in ongoing maintenance costs associated with property ownership?
The next area of focus is customer demand. Let's say you own a shop that sells five products: apples, oranges, bananas, strawberries, and napkins. As sales slow down, you get worried and decide to conduct a sales analysis. You realize that napkins are your best-selling item with high margins. Focused on maintaining that success and high margin, you eliminate bananas from your offering since they have the worst margins and sell the least.
Lo and behold, a few months later, napkins are still your top seller – almost every customer buys a napkin – but overall sales are still shrinking. By only focusing on the success of a single item, you've failed to realize the connection between your other products and napkins. By the time you eliminate more items that aren't selling as well, you've almost entirely eliminated your customer base and, of course, the need for napkins.
Lastly, a topic I'm particularly passionate about: hustle culture. Mainstream media, social media, business coaches, and many people in the world of entrepreneurship glorify those who work more hours, make more sacrifices, sleep less, and push themselves to (and past) their limits. It's easy to see why a new entrepreneur feels daunted by starting a business when they think this is the only path to success. The prominent hustle culture fanatics fail to take into account the vast number of entrepreneurs that fail due to stress and burnout. They also fail to realize that often the long hours worked are due to inefficiencies and that the successful entrepreneur on their pedestal didn't find success until they became more efficient with their time.
Are there exceptions? Sure. But the point here is that exceptions go both ways. It's just a lot less "sexy" to share the story of a person who slowly built a successful business over a decade while successfully managing their personal health, family life, and getting eight hours of sleep.
Case in point – The Lord of the Rings. What an amazing journey. The hardships, the sacrifices, the cliffhangers… It makes for an incredible watch. And it leaves you thinking, "There's no way I could have ever made it through and successfully destroyed the ring..." It wouldn't be much of a movie if Gandalf just took the ring, called up one of his eagle friends, flew quickly to Mordor, and dropped the ring in the mountain...
Let's Look Forward
I think it's important to take a moment and realize that survivor bias is a very real and present thing in the world. We hear examples of it every day – "My great-grandma smoked and drank every day and lived to be 103" or "We didn't have seatbelts, and we survived" – sometimes failing to consider survivor bias can lead to severe consequences.
Don't let survivor bias negatively affect you or your business. Take the time to be thoughtful and purposeful about your role models and decisions, and hopefully, we can look at you as a positive example in the future!
I'd love to hear your thoughts on survivor bias, how it may have played a role in your business journey, or feel free to share a couple of examples of your own!