Survivorship bias everywhere

Survivorship bias is one of those rare ideas that is at once instantly accessible and incredibly powerful. The classic explanation of survivorship bias is when a mutual fund company advertises the 5-year or 10-year returns of the funds it offers, without reporting the 5-year or 10-year returns of all the funds that didn’t survive 5 or 10 years, since they were closed for underperformance in their first year or two. That leaves potential customers with an inflated idea of the fund company’s management expertise, since the company’s performance is inflated by survivorship bias.

Once you understand survivorship bias, I think it’s worth taking seriously and applying to a whole range of situations. The key question survivorship bias raises is: are the survivors winning for a manifestly objective reason, or are they winning because the losers have been excluded from the comparison? And how can we tell the difference?

Why does the United States have the largest economy in the world?

Once you know that the United States has the largest economy in the world, there are a lot of reasons that spring to mind to explain that achievement:

• geographic isolation means that even catastrophic global conflicts affect the United States only indirectly;
• a strong tradition of rule of law means that people are more willing to enter into long-term, speculative investments, knowing that they’ll have recourse to a neutral arbiter in case of disputes over the terms of the investment;
• the protestant ethic means that Americans are unusually inclined to labor, raising the return to capital and increasing capital investment in the United States compared to other countries;
• an oppressive welfare state focused on the “working” poor over the “undeserving” poor increases the labor force participation of Americans who would otherwise perform household labor like child-rearing and elder care that would not show up in GDP calculations.

And of course all these explanations, plus as many others as you can conceive, are correct. But they’re only correct once you know that America is the largest economy in the world, just as you can only calculate the 10-year annualized return of mutual funds that are still in business after 10 years.

What if the United States were a country imploding with inflation and struggling to avoid default? Well, our economists would soberly conclude that:

• geographic isolation means that our natural resources and manufactures are too expensive to export to the rest of the world;
• our rule-bound judiciary isn’t flexible enough to adapt to changing conditions on the ground;
• the protestant ethic means workers are willing to continue working for low wages even when they’d be better off changing jobs, returning to school, or migrating to a higher-wage country in order to improve their financial situation and remit payments home;
• a welfare state that exclusively rewards paid work has inflated the number of jobs in the unproductive childcare and eldercare sectors, while forcing workers into unproductive jobs in order to trigger the welfare payments they need to survive and care for their families.

Why do so many bloggers rely on credit card affiliate revenue?

Once you know that bloggers in the financial independence, travel hacking, and other blogging spaces rely on credit card affiliate revenue, one conclusion you could come to is that in order to maintain a successful blog, you need to rely on betraying your readers and selling them credit cards they neither want nor need, in anticipation of banks being able to earn more from the people you refer than the amount of your referral commission.

But this, too, is a case of survivorship bias. It confuses the fact that a majority of surviving blogs rely on credit card affiliate revenue for the claim that in order to survive you need credit card affiliate revenue, just as people confuse the fact that the largest economy in the world has a strong tradition of rule of law for the claim that a strong tradition of rule of law is essential for having a large and growing economy (an obviously false claim, see, e.g., China, People’s Republic Of).

Acknowledging survivorship bias means rethinking a whole range of conclusions

In a world subject to survivorship bias, it’s never enough to look at the current state of the world and draw conclusions about how that world “really” works, because your conclusions are invariably based on the characteristics present in the successful people and institutions that survived, whether or not those same characteristics were present in the people and institutions that did not.

If you’re a successful professional, you’re bound to attribute your success to particular characteristics you identify in yourself. But that’s a sampling error, pure and simple; you don’t know how many people with those identical characteristics failed to achieve your level of success.

Likewise suggesting the poor, the hungry, the homeless, or the sick made the wrong decisions in their life suggests an aggressive ignorance of all the people with the same attributes, and who who made the same decisions, but who faced none of the same consequences.

Conclusion

Why is Bitcoin the most valuable cryptocurrency in the world? Is it because it’s the most liquid? Is it because it has the best underlying code? Is it because it has the most distributed infrastructure? Maybe.

Alternatively, since Bitcoin is the most valuable cryptocurrency in the world, people are desperate to find an explanation why, and arrive at conclusions like liquidity, code quality, and infrastructure distribution.

And that is survivorship bias, pure and simple.