Beware of Survivorship Bias

I had a fun dinner last night with some of the employees who work for my client. One of them asked me about our most recent podcast, which took us down the finance rabbit hole. One of the young men commented on how debt is good, citing its prevalent use as a common trait amongst wealthy people. The dots were connected that using debt fuels success. In some ways, he's right. Using debt can propel success. On the flip side, however, just as using debt can accelerate success, it can also accelerate failure. But we don't talk about that much in our culture. Why?

It reminds me of a story I once heard about WWII. After the battle, the bomber planes returned to base riddled with bullet holes. Most prominently, the wings and tail looked like Swiss cheese. After assessing the damage, the experts recommended they add more armor to these areas of the plane. After all, these were the hot spots getting obliterated by enemy fire. Then, one man stepped in and proclaimed they should do the opposite. Instead of armoring the areas of the plane most hit, they should armor the areas of the plane least hit. Why? Because the only planes they had access to were the survivors. What did the missing planes look like? If the surviving planes had limited damage to the engine and cockpit, that could be the tell. The experts had become biased due to having just one particular data set (the survivors), not considering a whole other data set missing. They got fixated on what they could see, and forgot about what they couldn't see.

Back to wealthy people and debt. Yes, many wealthy people attribute some of their success to using debt. There's truth in this. However, it's only part of the story. These are the survivors. These are the ones who made it back to base. What about the others? As much as the winners are talking about winning, most losers aren't publicly talking about losing. It can be embarrassing and uncomfortable. So we get a cultural echo chamber where the only people we hear from are the survivors.

Asked another way, how often have you heard someone in your life talk about how much they lost at the casino? Not many. Same with the stock market. How many people in your world do you know that openly talk about getting absolutely thrashed by that hot stock tip they received from some co-worker or neighbor? It's rare. The silence is deafening. We only hear from the survivors.

You may have heard the stories of people who used debt and won. They are more than happy to boast about their spoils. On the other hand, I have met with dozens upon dozens of families who didn't succeed. They used debt.....and lost. They didn't survive. These are some of the saddest situations I can think of. And they are suffering in silence.

Beware of survivorship bias.