Plane Spotting

The image shows an outline B-17 Bomber airplane (or aeroplane? I can never decide on that one!) commonly used by the US Air Force in WWII. The red dots represent bullet holes from incoming enemy fire.

The US Air Force reviewed the markings left on planes returning to base following air raids during WWII. They initially decided that in order to protect pilots they would armour the plane using reinforced steel plates on the parts of the aircraft most affected. The theory was that although the plates would weigh down the plane, it would be worthwhile so more pilots returned safely to base.

The issue with that is that none of the planes that returned had marks in the cockpit or by the engines. Reason why? Aircrafts will not return if they take fire there!

This is one of the most famous examples used for 'Survivorship Bias'.

One of the most perennial ways I see this bias is in the 'How To Get Rich' category of books out there. People buying and reading these books (me included at one point) want to get the secret sauce for success. We are only really hearing from the people who have already made it to the top and ignoring the majority who might have followed the same path but not been so lucky.

Also, in the investment industry, you only really hear from the fund managers who have been running funds for long periods of time or have had strong recent performance. We rarely hear of the funds that have closed or even more crucially, understood the reasons why they never quite made it.

👎 Exploring failures is the best way to try and avoid this bias. Finding out what doesn't work can be just as important as delving deep into reasons why people/funds have succeeded and why.

🧠 Another way to help, is to think critically around the data you are observing. Ask yourself, is what you are being told or reading universal or area specific? For example, in a fund manager meeting, they can tell you that they have a great 10 year track record. When you look at funds in the same sector, there will be lots with a one year, some less with a three year, even less with five year and by the time you get to that 10 year number, only a handful for the FM to beat! It's now a great number because they survived! (Disclaimer: This isn't all the time but you get my point.)

I'm now off to do some plane spotting...