Lesson 1 of 5 · 3 min · Thinking
The planes that came back
What you do not see can matter more than what you do.
In the Second World War, American analysts studied the bombers that made it home. They were full of bullet holes.
The obvious plan was to add armor where the holes were. The statistician Abraham Wald argued for the opposite.
These were the planes that survived. The ones hit in the engines never came back, so nobody got to count their holes.
Finance is full of this. Funds that do badly get closed or merged away, and they quietly drop out of the statistics.
So when you look back at the funds around today, the past looks better than it was. The losers are simply no longer in the picture.
It is the same with success stories. The founder who dropped out and got rich gives interviews. The thousands who dropped out and did not, do not.
Quick question
A newsletter shows you ten stock picks that all went up. What should you ask first?
- Which pick went up the most?
- How many picks are not shown?
- How long did they take?
Show the answer
How many picks are not shown?
Ten winners mean little if a hundred losers were left out. Always ask what did not make it into the picture.
Keep this one
Ask what is missing from the picture.
Where this comes from
Abraham Wald, memos for the Statistical Research Group at Columbia University, 1943. The famous plane drawing came later and simplifies his math, but the idea is his.