Survivorship Bias In Financial Resilience

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The picture above is probably one of the most famous from the WW2. It depicts the holes made by bullets in US aircrafts which returned from fight missions. It was used to decided which parts of the aircrafts needs to be reinforced. The US military initially decided to armor the areas with most bullet points. They looked to be the most vulnerable, after all.

But then a guy named Abraham Wald, part of a Statistical Research Group at Columbia University, suggested to armor the parts with no bullet holes at all.

It may sound counter-intuitive at first sight, and it is one of the best examples of survivorship bias.

But it makes a lot of sense once you give it some proper thinking: the bullet holes were all in the planes that survived, those that actually made it back. Which means those areas, as damaged as they were, were the ones capable of sustaining hits without the plane crashing. Which makes then obvious the conclusion that the planes which didn’t came back were hit in the other places. So, to increase the number of planes returning, you have to armor the areas with no holes, because those areas were the most fragile.

There’s Meaning In Failure

Survivorship bias tilts our thinking towards all the processes or actions that survived more, even though there is a lot of meaning in all those that didn’t make it. We tend to give more importance, to appreciate more our successes, just because they confirmed our intentions, and discard failures, because they didn’t.

The most frequent consequence of survivorship bias is that we tend to repeat, or to enhance what proved to work already, what generated results. We are trying to armor the parts that survived already, ignoring the ones that didn’t make it.

By doing that, we increase our chances to repeat similar successes. But we will never expand, extend or grow. And by staying in the same area, we will become fragile.

Whereas if we focus on the parts that didn’t make it, on the processes that failed, and try to improve those, we actually increase our odds to cover more ground.

There’s meaning in failure.

Owning Your Crashed Planes

There’s no fun in failure, don’t get me wrong. Failing in business, or in personal relationships, sucks big time. I’ve been there more than once. I’m not a big fan of all those “failure festivals” in which people are sharing their failures, like it would be something to be proud of. Not at all. If you fucked up, you fucked up, don’t try twisting it into some sort of weird success.

But even if you fucked up, even if you lost some planes, try looking deeper and deeper at what made them crash. It’s a painful process, because we associate failure with loss. Loss of money, loss of reputation, or of self-esteem. But it’s necessary to try understanding what were the fragile parts, were you overextended, or where you hesitated too much. Then you can work on those areas by practicing the processes on a smaller, less riskier scale, until you get comfortable, and you can safely start flying again.

Own your crashed planes, your failed businesses and relationships, not by endlessly reinforcing what already proved to be working, but by never repeating whatever it was that generated the crash.

Picture By Martin Grandjean (vector), McGeddon (picture), Cameron Moll (concept) – Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=102017718

Initially published on my <a href"https://www.dragosroua.com/survivorship-bias-in-financial-resilience/" rel="canonical">blog.

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