Investments · Life Skills · Money Behaviour · ServeTM

The Devils of Investing: Survivorship Bias

Money management is more a matter of managing our own psychology than just understanding the numbers. Warren Buffett says it clearly, “Until you can manage your emotions, don’t expect to manage your money”.

Let me talk about some issues and biases that work against us when it comes to investing. They are the devils of investing! Let me start with survivorship bias today. An example of survivorship bias in investing:

  • IN INVESTING: Mutual fund companies boast “our fund returned an average of 18% over the last 20 years!” It sounds like they’re saying, “if you invested 20 years ago, you would’ve made 18% on your money.” But that’s not true. The company is excluding all the bad investments that didn’t survive the 20-year period. Only the winners show up in their data.

In reality, the average investor earns less – in many cases, much less – than mutual fund performance reports would suggest. This happens because the average investor mostly joins in when the market is booming and gets jittery when the markets are down. So even though the mutual fund scheme may have returned 18% over a specific period, an average investor may even lose money in the same scheme if he got his timing messed up.

So let’s find out more about this survivorship bias, because once you understand it, you start seeing it everywhere:

What is Survivorship Bias?

Survivorship bias is an error when we concentrate on the people or things that “survived” some process and inadvertently overlooking those that did not because of their lack of visibility. This can lead to false conclusions in several different ways.

Survivorship bias can lead to overly optimistic beliefs because failures are ignored. It can also lead to the false belief that the successes in a group have some special property, rather than just coincidence.

An example in the field of Education: If three of the five students with the best college grades went to the same high school, that can lead one to believe that the high school must offer an excellent education. This could be true, but the question cannot be answered without looking at the grades of all the other students from that high school, not just the ones who “survived” the top-five selection process.

There are many popular examples in the media.

Whether it be movie stars, or athletes, or musicians, or CEOs of multi-billion dollar corporations that dropped out of school, popular media often tells the story of the determined individual who pursues their dreams and beats the odds. There is much less focus on the many people that may be similarly skilled and determined but fail to ever find success because of factors beyond their control or other (seemingly) random events

Life is so much more than what we see. There’s always a game being played around us. And what we don’t see can trump what’s in front of our faces.

So, how do we deal with this survivorship bias in us?

The first thing to do is to realize that there’s this devil called “survivorship bias” that tries to take decisions on behalf of us. Now that we know the problem, let’s find out a way!

There are two words that we can add to our vocabulary and they are: “Really?” and “So What“. These words will give us some bandwidth to ponder over what is being told to us. Once we utter these magic words, we’ll find ourselves capable of finding the truth.

Do share your stories of your own biases and how you overcame them. Thanks for reading.


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