Survivorship Bias, Dot Coms, the Media
Buy the rumor, sell the news
One of the things to do on social media, especially Twitter, is to make fun of the olds who don’t get it—whether “it” is non-fungible tokens, genetic engineering, economics, or Amazon’s prospects circa 1999. And that’s what has been making the rounds lately: a video of a 60 Minutes episode from 1999, in which a bunch of journalists, who we now know to be foolish, mocked Amazon:
It all fits a neat and seductive narrative: journalists are idiots who just don’t get it.
But before we get too satisfied with our smug superiority, let’s consider this: Amazon is one of the only survivors of the dot-com era. On average, journalists were correct when they mocked the viability of various dot-com startups. We, sitting in 2021, see only the survivors. When we mock the journalists of 1999 for being so stupid (and, again: they often are!) we are succumbing to the survivorship bias fallacy.
Farnam St. blog has a great post about survivorship bias:
Survivorship bias is a common logical error that distorts our understanding of the world. It happens when we assume that success tells the whole story and when we don’t adequately consider past failures.
There are thousands, even tens of thousands of failures for every big success in the world. But stories of failure are not as sexy as stories of triumph, so they rarely get covered and shared. As we consume one story of success after another, we forget the base rates and overestimate the odds of real success.
…
A college dropout becomes a billionaire. Batuli Lamichhane, a chain-smoker, lives to the age of 118. For young men are rejected by record labels and told guitar groups are on the way out,” then go on to become the most successful band in history.
Bill Gates, Batuli Lamichhane, and the Beatles are oft-cited examples of people who broke the rules without the expected consequences. We like to focus on people like them—the result of a cognitive shortcut known as survivorship bias.
The problem here is that we focus on outliers, like Amazon, and assume that the outlier represents the normal state. “Of course journalists are idiots!” we conclude. “Just look at Amazon!” But outliers are not the normal state…because they are outliers!
What’s interesting about outliers is that sometimes our intuition is correct. No one who looks at Shaquille O’Neal would conclude that the average adult male is over 7 feet tall and weighs more than 300 pounds. The reason why our intuition about outliers works here is because we see evidence every day with our own eyes that Shaq is unusual. Most adult males we see are far shorter than seven feet. But, when it comes to businesses, most of us only interact with, and so are only aware of, extant ones. The survivors—the outliers—become our normal world, and we infer, wrongly, that success is the default state.