12. Survivorship bias

Our tendency to focus only on the success stories is what is known as the survivorship bias.

That is, we only see what is in front of us, to the exclusion of all else. For every successful investor like Warren Buffett, there are many more value investors who tried and failed to achieve anywhere near his levels of success.

For every billionaire hedge fund manager like George Soros, there are thousands more who tried setting up their funds, raising capital and investing it; only to end up losing their businesses, if not their shirts.

Likewise, for every ultra successful tech entrepreneur like the late Steve Jobs, there are countless others who aspired to achieve the same levels of innovation and success, but failed somewhere along the way.

When seen through the lens of human struggle, resilience, and ultimately victory, the successful folks deserve to be lauded and lionized.

After all, they worked hard to achieve whatever they have. Right?

Unfortunately, no.

This is just our narrative bias at work, where our minds create stories to justify events – that is, we mix up correlation and causation. An easy way to recognize this is to realize that struggle, resilience, and victory are the foundations of every good Hollywood movie; and we all know that movies hardly ever reflect the realities of life.

This is made clear when seeing success through the lens of probability.

Every sample has its outliers; and that’s exactly what the ultra successful are.

Another way to think about this is that someone is bound to be successful in a large enough sample. Since many people try to start their own business, hedge fund, or become value investors, someone is going to be successful.

If not Buffett, Soros, or Job, then someone else in those fields

Furthermore, since outcomes in business and finance follow Power Law (Pareto) distributions rather than Normal (bell curve) distributions, the staggering amount of wealth gathered by the successful isn’t all that surprising.

Power Law distributions mean that winners reap most of the rewards, leaving precious little for everyone else; hence the extreme outcome of those who don’t win almost always losing everything.

It is a winner takes all world, with the caveat that the probability of becoming the winner is frightfully low.

This isn’t to denigrate the hard work, perseverance or talent of any successful individual, but to make the very important point that luck matters a lot – often what we can’t see matters more than what we can.

And what we can’t see are the failures, who incidentally can give the most instructive lessons, simply because they can tell us what not to do.

To be continued…