The Gloria Gaynor effect: are entrepreneurs deluded?

May 17, 2015

During World War II military engineers wanted to figure out how to make bomber planes safer for the pilots who risked their lives to fly them. These bombers were the fundamental to the allies’ strategic bombing, yet they were constantly being shot down over enemy territory. When the engineers looked at returned planes, they saw that bullet damage clustered in three main places: the wings, the body, and the rear gunner. These were the places they suggested be reinforced with extra armour. Fortunately for the army could call on the help of a statistician named Abraham Wald. His brilliant insight was that the holes from flak and bullets on the bombers that did return represented the areas that were actually able to take damage; a plane could get hit multiple times in the wings, body, and rear gunner and still continue flying. It was the planes that hadn’t returned that held the key to understanding where the problems lay –  it was the rest of the plane that needed reinforcement. I read this story on David McRaney’s blog You Are Not So Smart. It illustrates a logical fallacy known as survivorship bias.

Survivorship bias happens we concentrate on the people or things that survived some process and inadvertently ignore those that did not because we do not see them. This can lead us to over-optimism. We find survivorship bias in many areas of life. In business finance failed companies are excluded from performance studies, skewing the results. They would be very different if we included the businesses that failed. I previously mentioned this fallacy in a post about Warren Buffet. In Fooled by Randomness, Nasseem Taleb pointed out that while Buffet might well be an accomplished investor, a large population of random investors would almost necessarily produce someone with his track records just by luck. Taleb talks of a massive game of Russian roulette in which we only see the survivors.

Scott Fitzgerald, Mark Zuckerberg, Charles Darwin, Woody Allen and Steve Jobs all failed to finish university. Richard Branson, Thomas Edison, the Wright brothers Quentin Tarantino, and Bobby Fischer didn’t even finish school. Should we then stop compulsory schooling after the age of fourteen? Part of this phenomenon may be that the ones who failed academically took more risks. If you have a degree from a top university, you can walk in to many lucrative jobs. You have less incentive to take risks. Nevertheless, what we are seeing here is survivorship bias. In the United States over a third of each enrolled class of university students. drop out before graduation. While there may be a handful of outstanding successes, they will inevitably be a small proportion of those who dropped out.

In his book The Art of Thinking Clearly Rolf Dobeli sums it up nicely:

Behind every popular author you can find a hundred other writers whose books will never sell. Behind them are another hundred who haven’t found publishers. Behind them are yet another hundred whose unfinished manuscripts gather dust in drawers. And behind each one of these are a hundred people who dream of—one day—writing a book. You, however, hear of only the successful authors (these days, many of them self-published) and fail to recognize how unlikely literary success is. The same goes for photographers, entrepreneurs, artists, athletes, architects, Nobel Prize winners, television presenters, and beauty queens. The media is not interested in digging around in the graveyards of the unsuccessful. Nor is this its job. To elude the survivorship bias, you must do the digging yourself.

I also think it is important to look at both success and failure. It is vital to see the cases where it all went wrong. Were they doing things do differently? There should be bestsellers by people who have failed, but we don’t want to hear those stories. There are no easy lessons, I am sure that if you visit the graveyard of failed individuals and companies, you will find that many of those there possessed many of the same traits of the winners. This make sceptical about those books like 7 Habits of Highly Successful People or the ones that tell us lessons from this company or that corporate leader. We would need to create 20 Facebooks, which would all employ slightly different strategies.

Now we come to the second part of my post: are entrepreneurs deluded? When you see the statistics for business failures you would have to ask why people would believe that they can buck this trend. Entrepreneurs must surely be more optimistic than the rest of us. They must have the ability to shut out all the things that can go wrong. This may or may not be a delusion, but we really do need to cherish entrepreneurs. They are the risk takers. When things go wrong, they will take a big hit. How different it is from those too-big-to fail banks we have had to bail out in the last few years.

Missing what’s missing: a video on survivorship bias

May 17, 2015

This a TED video from David McRaney of the You Are Not So Smart. blog.