Everything is Survivorship Bias

December 12, 2023

Hernan Cortes famously traversed the Atlantic in the 16th century in search of gold and glory. Upon landing in modern-day Mexico, his men, weary from the long journey, had little interest in taking on the Aztec empire. You can understand their reluctance. The voyage was long and brutal. They had family back home in Spain. There were only so many of them and there were an unknown number of Aztecs. Etc., etc. So Cortes… burned their own ships. There was now only one way to proceed. Onward. The rest is history. Cortes and his men conquered the Aztecs and claimed Mexico for Spain.

“Burn the ships” is now common vernacular. It’s the kind of story you hear in a TED Talk. Or used as an analogy by some pricey consultant with an Ivy league degree. Remove the possibility of failure. Take bold action. Irreversibly commit to your goals. Burn the ships.

It sounds brilliant. A compelling story of great bravery from history. Real world application today. Like listening to a sermon with a perfect three-point application on Sunday morning. And it worked well for Cortes!


This clever anecdote suffers from a psychological bias that renders it useless. Possibly harmful. Perhaps on balance the burn the ships metaphor is instructive of what not to do…

Burn the ships is merely survivorship bias. The psychological error of systematically focusing on successes while ignoring failures that cause us to miscalculate probabilities of success. This mental trap is especially pernicious as it results from discounting the evidence you don’t see. It is hard to account for evidence you don’t see! So survivorship bias is everywhere wearing camouflage. How many other 16th century conquistadors employed the burn the ships strategy only to incite a mutiny? Or be slaughtered by the natives? No one knows! We just know about Cortes because he survived. We think burn the ships is a brilliant strategy, but it’s only an interesting story about survivorship bias.

Much of the Pacific Theatre of World War II was fought in the air. The Allies, seeking an edge in the skies, planned to add armor to their planes. A group of analysts examined planes returning from battle and plotted the location of the bullet holes. They discovered bullet holes clustered on the plane’s tail and wings, so they planned to reinforce those locations. Until a statistician named Abraham Wald realized their impending mistake. The only planes in their sample were the ones that survived. They didn’t know the location of the bullet holes on the planes that went down. Survivorship bias. The Allies pivoted and added armor to the unharmed areas of the planes they observed – notably around the engine. It worked. Wald’s recognition of survivorship bias saved countless pilots.

Survivorship bias constantly beats investors over the head. Recall stories of unicorn startups. In investing lexicon, a unicorn is a privately held company that reaches a $1 billion+ valuation. The classic archetype is a tech company started in a garage by a college drop out. Mark Zuckerberg, Bill Gates, Steve Jobs - all college dropouts. They started Facebook, Microsoft, and Apple, respectively, in their 20s after leaving school diploma less. Their success has led many investors – even prominent venture capital funds – to invest in tech founders with similar characteristics. I can’t prove it, but I suspect the history of Zuckerberg/Gates/Jobs contributed to Sam Bankman-Fried’s (SBF) fundraising prowess. SBF, the famously disheveled late-twenties former billionaire founder of crypto exchange FTX, once raised $214,000,000 from Sequoia Capital (perhaps the most prestigious venture capital firm in the world) after a Zoom call during which he was playing a video game. You read that correctly. He was pitching a fancy VC firm over Zoom, and he couldn’t be bothered to put down the video game controller while doing so. And they wrote him a $200,000,000 check! To quote a Sequoia partner present on the Zoom call, “we were incredibly blessed. It was one of those your-hair-is-blown-back type of meetings.”[i] Then Sam stole billions of his customer’s money Bernie Madoff style, and is now in prison. Sequoia wrote down its $214M investment to $0. Not quite Steve Jobs!

Show an investor (or even an esteemed VC firm) an unkempt college drop-out founder working on a tech company and investors line up to write checks. They’re thinking of Microsoft and Facebook and Apple and Amazon. But that’s survivorship bias! How many college dropouts never managed to get their startup out of the garage? Most of them! You just don’t know their names. You’ve never heard their stories. It’s all unseen evidence. You only know about the unicorns that worked. So you woefully miscalculate the probability of success when evaluating investing in a startup. Survivorship bias wears camouflage.

What happens when you create a hedge fund run by all-star traders and Nobel-prize winning academics? Long Term Capital Management (LTCM) was founded with just such a roster 1993. You can imagine how they framed the sales pitch. You can have your money managed by the guys down the street or by the best traders paired with the smartest academics. Or maybe they just hollered “Nobel Prize!!!” until investors threw money at them. Either way, the pitch worked. Investors ponied up a minimum $10,000,000 to invest in the fund. It turns out what happens when you create a hedge fund of brilliant traders and Nobel laureate academicians is something along the lines of they massively lever up, wipe out their investor’s capital, nearly trigger a global financial crisis, and initiate a government bailout.* Russia defaulted on its bonds in 1998, LTCM had a levered long position on said bonds, and the fund collapsed (sorry, investors!). The government grew nervous about resulting global contagion and stepped in with a $3.65 billion bailout (sorry, taxpayers!). The all-star traders and Nobel laureates spent the next two years selling off assets to repay the bailout before shuttering the fund in 2000.[ii]

Tremont Capital Management, a leading supplier of hedge fund performance data, contains LTCM’s performance data through October 1997. It records a net return to investors of 32.4% annually from 1994 – 1997, the four full calendar years before LTCM blew up. 32% net annually is great! Go hedge funds! Then LTCM exploded in 1998, and the returns after the Blow-Up-Because-Of-Levered-Bets-On-Russian-Bonds episode don’t show up in the dataset. LTCM’s real performance record is -98.1% (-27% annually).[iii] LTCM is one example of a ubiquitous problem in datasets showing fund returns (whether mutual funds, private equity funds, hedge funds, venture capital funds, whatever). The datasets often don’t include the results of funds that have been closed. Typically funds close due to poor performance. Or sometimes because they nearly trigger a global financial crisis! But then they don’t show up in the aggregate performance data.

Everything is survivorship bias.

It’s just wearing camouflage.  

Sean Cawley CFP®

*Wait, the U.S. government bailed out a hedge fund in the 90s?! Yes, yes it did.


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This commentary reflects the personal opinions, viewpoints, and analyses of Resolute Wealth Management. It does not necessarily represent those of RFG Advisory, clients, or employees. This commentary should be regarded as a description of advisory services provided by Resolute Wealth Management or RFG Advisory, or performance returns of any client. The views reflected in the commentary are subject to change at any time without notice.



[iii] David F. Swensen, Unconventional Success: A Fundamental Approach to Personal Investment. (New York: Simon & Schuster, 2005), 127.