In the fast-paced world of business, corporate managers and CEOs often find themselves making crucial decisions based on data and analysis. Despite these objective tools, there is an insidious phenomenon that can deceive even the most experienced business leaders, and that is survivor bias (or survivorship bias). This concept, if overlooked, can lead to incorrect management decisions, with significantly negative consequences for companies.
Survivor bias is a logical fallacy that occurs when one focuses only on successes, ignoring failures. It is a dangerous bias because it leads the person involved to overestimate their chances of success, believing that simply following in the footsteps of those who have succeeded will yield the same result. However, reality is much more complex. For every success story, there are countless untold or unknown stories of failure.
In the corporate context, survivor bias occurs when CEOs focus attention only on a portion of the available data, ignoring or underestimating those that are not visible due to an absence. Essentially, it is a matter of giving too much weight to exceptional and unrepresentative successes, neglecting information on competitors’ failed experiences.
How Does Survivor Bias Affect Business Decisions?
There are several examples to fully understand the damage this bias can cause.
A first example might be the identification of a specific marketing strategy adopted by a competitor company. The CEO might be tempted to emulate this strategy without considering that many other companies have adopted similar strategies without achieving the same results or, worse, obtaining negative results. The mistake is in considering only the successful examples and coming to the wrong conclusion about the likelihood of success of a similar strategy in the company.
A second example would be to analyse the career path of successful people in order to draw conclusions on what the best professional development practices are. In this case, the risk is that CEOs may ignore the fact that there are many other people with similar career paths who haven’t achieved success, and thus aren’t considered in the reasoning.
A final example concerns market analysis. If the CEO focuses only on successful multinational companies, the mistake would be to overestimate the ease of become a market leader, ignoring all the companies that have failed.
Avoiding Survivor Bias
It is not easy to avoid a possible error, especially in today’s hectic environment. However, there are some precautions to consider that allow limiting, if not eliminating, it.
- Complete data analysis
As seen before, this error occurs because CEOs only focus on certain types of data. It becomes essential to collect data carefully and impartially, considering all available examples.
This allows for the analysis of a complete set of data, including both successes and failures, to obtain a comprehensive and realistic picture.
It is as important to study failures as much as successes to identify potential pitfalls to avoid and learn important lessons for the future.
- Testing and experimentation
Regular testing and experimenting with different strategies allow CEO to explore a variety of approaches.
This strategy can lead to a better understanding of the factors that contribute to the company’s success or failure.
- Promoting a feedback culture
It is crucial to encourage employees to openly share their experiences, both positive and negative, in order to create an environment of continuous learning within the company and to foster working harmony.
The Importance of Awareness
As seen below, survivorship bias produces an inaccurate sample, causing CEOs to jump to incorrect conclusions.
Being aware of its existence is the first step to avoid its traps. Only by analysing complete data, considering the context, and learning from failures is it possible to make informed and realistic decisions to achieve CEO’s goals and lead companies to lasting success.
It is important to always keep in mind that for every success story, there are many untold failure stories. Understanding the full context allows CEO to make informed decisions.
Written by Riccardo Pandini.
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