Is survivorship bias affecting your investment decisions?
To understand this concept better, let’s go back a few years – back to World War II. A Statistical Research Group (SRG) in USA was assembled to understand data from the jets that returned from Nazi Germany, post a round of combat.
The task on hand was simple – use data to understand which part of the plane needs armour, keeping in mind that armour is heavy and makes the jet less manoeuvrable. Bullet holes on different parts of the jet were used as data points.
Most jets that returned saw multiple bullet holes around the wings, tail and fuselage, and very few around the engine. So the answer is simple right?
“More armour around the wings, tail and fuselage”
Wrong. The data is to be read as, “If the jets can handle fire in these areas, that means these jets are capable of returning. The armour is needed in areas with the least affected by bullets, as those jets aren’t returning from combat”. The engine needs more armour!
Funnily enough, there is great learning from this which can be applied to investing in general, such as:
1. Fund Performance:
When looking at the performance of a particular fund, have a look at the stocks which were removed from the fund due to bankruptcy or failure. If any of those companies are removed from the analysis, the fund could be showing returns better than actual
2. Investor Stories:
People always tend to focus on their portfolio multibaggers and not on their poor performing stocks. This can create a skewed image of the investor and portray them as more successful than they actually are
3. IPO performance:
IPOs are considered a great way to generate listing gains amongst traders and investors. But not all IPOs are successful, as witnessed in the recent past. Defunct or poor performing IPO companies if not taken into consideration, can lead to a distorted view of the overall IPO success rate
