Survivorship Bias is the logical error of concentrating on the people or things that “survived” some process and ignoring those that didn’t. This can lead to false conclusions. Two examples are The Millionaire Next Door: Surprising Secrets of America’s Wealthy
These two books take a very small pre-screened group of people/companies, and then look for what they have in common. In Millionaire Next Door says that Millionaires buy used cars and don’t buy expensive houses. But what about all the other people who do that? Are they millionaires? From Good to Great says that companies who excel don’t have attention grabbing CEO’s and start their transition by hiring the right people. What about all the other companies that go by that formula? Do they excel?
MD over at Studenomics had a post today that mentioned Survivorship bias for Entrepreneurship. A reader had suggested starting a business as a means to get rich, and MD replied:
The survivorship bias is lethal.
Too often do we hear about the successful small business owners. What about the 40-year old that lost his home on a bad business deal? We always hear about those that turned a tiny operation into a colossal business that employs half of the town. Nobody wants to hear about the small business owner that went poor and had to find a new job. The survivorship bias can be dangerous when one is looking into entrepreneurship.
My reply:
In my opinion, survivorship bias is not a big issue with aspiring Entrepreneurs. In fact, as I’m starting my own retail business, almost everyone tries to tell me how hard it is and how unlikely I am to succeed. Everyone has a story about someone they know who tried to start a business and failed. That’s why so many people never even try to start their own business – the risk of failure.
I hate to say it, but in every one of those failures, I could have predicted it before their launch – because the “Entrepreneurs” were completely unprepared. They didn’t even know what skill sets they should have, much less which ones they didn’t have. They believed that their undergrad degree in General Business made them knowledgable and the fact that they had been a waiter made them capable of running a restaurant…
You make your own luck in this world.
In truth, it really depends on your surroundings. If all you read were books/blogs that showed people becoming millionaires from starting their own business, and you didn’t have any one out there reminding you about the high failure rate – the survivorship bias would be quite strong. Personally, I see the opposite as more of a problem today. Too many people have failed as Entrepreneurs, and rather than blame themselves, they tell stories about how difficult it is and they expect you to fail.
You can’t let anecdotes control your life or your choices. It doesn’t matter if the failure rate of start-ups was 10% or 90%, you have to make a choice for yourself whether to give it a shot or not. You can’t succeed if you don’t try.
People said you can’t make money in airlines, and history had proved them right. Richard Branson listened, learned, then ignored them and went on to create a very profitable airline, Virgin Atlantic.
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