the official site of Michael Shermer

top navigation:
Scientific American

Surviving Statistics

published September 2014 | comments (1)
How the survivor bias distorts reality
magazine cover

When I purchased my latest vehicle, I was astonished to get the license plate 6NWL485. What are the chances that I would get that particular configuration? Before I received it, the odds would have been one in 175,760,000. (The total number of letters to the power of the number of letters on the plate times the total number of digits to the power of the number of digits on the plate: 263 x 104). After the fact, however, the probability is one.

This is what Pomona College economist Gary Smith calls the “survivor bias,” which he highlights as one of many statistically related cognitive biases in his deeply insightful book Standard Deviations (Overlook, 2014). Smith illustrates the effect with a playing card hand of three of clubs, eights of clubs, eight of diamonds, queen of hearts and ace of spades. The odds of that particular configuration are about three million to one, but Smith says, “After I look at the cards, the probability of having these five cards is 1, not 1 in 3 million.”

The conclusion seems obvious once you think about it, but most of us are regularly fooled by the survivor bias. Consider the plethora of business books readily available in airport bookstalls that feature the most successful companies. Smith analyzes two of the best sellers in the genre. In his 2001 book Good to Great (more than four million copies sold), Jim Collins culled 11 companies out of 1,435 whose stock beat the market average over a 40-year time span and then searched for shared characteristics among them that he believed accounted for their success. Instead, Smith says, Collins should have started with a list of companies at the beginning of the test period and then used “plausible criteria to select eleven companies predicted to do better than the rest. These criteria must be applied in an objective way, without peeking at how the companies did over the next forty years. It is not fair or meaningful to predict which companies will do well after looking at which companies did well! Those are not predictions, just history.” In fact, Smith notes, from 2001 through 2012 the stock of six of Collins’s 11 “great” companies did worse than the overall stock market, meaning that this system of post hoc analysis is fundamentally flawed.

Smith found a similar problem with the 1982 book In Search of Excellence (more three million copies sold), in which Tom Peters and Robert Waterman identified eight common attributes of 43 “excellent” companies. Since then, Smith points out, of the 35 companies with publicly traded stocks, 20 have done worse than the market average.

The survivor bias was evident in the reception of Walter Isaacson’s best-selling biography of Steve Jobs, as readers scrambled to understand what made the mercurial genius so successful. Want to be the next Steve Jobs and create the next Apple Computers? Drop out of college and start a business with your buddy in the garage of your parents’ home. How many people have followed the Jobs model and failed? Who knows? No one writes books about them and their unsuccessful companies. But venture capitalists (VCs) have data on the probability of a garage start-up becoming the Next Big Thing, and here the survivor bias is of a different sort.

David Cowan of Bessemer Venture Partners in Menlo Park, Calif., told me in an e-mail: “For garage-dwelling entrepreneurs to crack the 1% wealth threshold in America, their path almost always involves raising venture capital and then getting their start-up to an initial public offering (IPO) or a large acquisition by another company. If their garage is situated in Silicon Valley, they might get to pitch as many as 15 VCs, but VCs hear 200 pitches for every one we fund, so perhaps 1 in 13 start-ups get VC, and still they face long odds from there. According to figures that the National Venture Capital Association diligently collects through primary research and publishes on their Web site, last year was somewhat typical in that 1,334 start-ups got funded, but only 13% as many achieved an IPO (81 last year) or an acquisition large enough to warrant a public disclosure of the price (95 last year). So for every wealthy start-up founder, there are 100 other entrepreneurs who end up with only a cluttered garage.”

Surviving those statistical odds is rare indeed.

topics in this column: ,

ClimeApocalypse

published August 2014 | comments (9)
Or just another line item in the budget?
magazine cover

In the year 2393 a historian in the Second People’s Republic of China penned a book about how scientists, economists and politicians living in the 21st century failed to act on the solid science they had that gave clear warnings of the climate catastrophe ahead. As a result, the world experienced the Great Collapse of 2093, bringing an end to Western civilization.

So speculate historians of science Naomi Oreskes of Harvard University and Erik Conway of the California Institute of Technology in their book The Collapse of Western Civilization: A View from the Future (Columbia University Press, 2014), a short scientific- historical fantasy. During the second half of the 20th century— the “Period of the Penumbra”—a shadow of anti-intellectualism “fell over the once-Enlightened techno-scientific nations of the Western world…preventing them from acting on the scientific knowledge available at the time and condemning their successors to the inundation and desertification of the late twenty-first and twenty-second centuries.” (continue reading…)

topics in this column: , , ,

The Myth of Income Inequality

published July 2014 | comments (74)
The American dream is not dead yet
magazine cover

One of the best-selling books of 2014 is Capital in the Twenty-First Century by French economist Thomas Piketty, a 696-page doorstop tome on economic history. Why is a data-heavy treatise from the “dismal science” so appealing? Because it is about income inequality and immobility, which in a December 2013 speech President Barack Obama called “the defining challenge of our time,” concluding that it poses “a fundamental threat to the American dream.” But does it? Maybe not.

The rich are getting richer, as Brookings Institution economist Gary Burtless found by analyzing tax data from the Congressional Budget Office for after-tax income trends from 1979 through 2010 (including government assistance). The top-fifth income earners in the U.S. increased their share of the national income from 43 percent in 1979 to 48 percent in 2010, and the top 1 percent increased their share of the pie from 8 percent in 1979 to 13 percent in 2010. But note what has not happened: the rest have not gotten poorer. They’ve gotten richer: the income of the other quintiles increased by 49, 37, 36 and 45 percent, respectively. (continue reading…)

topics in this column: , ,

Nuclear Nada

published June 2014 | comments (3)
Does deterrence prohibit the total abolishment
of nuclear weapons?
magazine cover

When I was in elementary school in the early 1960s, we were periodically put through “duck and cover” drills under the risibly ridiculous fantasy that our flimsy wooden desks would protect us from a thermonuclear detonation over Los Angeles. When I was an undergraduate at Pepperdine University in 1974, the father of the hydrogen bomb, Edward Teller, spoke at our campus about the effectiveness of mutual assured destruction (MAD) to deter war. He said that by stockpiling many weapons neither side has anything to gain by initiating a first strike because of the retaliatory capability of both to send the other back to the Paleolithic.

So far MAD has worked. But as Eric Schlosser reveals in his riveting 2013 book Command and Control, there have been dozens of close calls, from the Cuban missile crisis to the Titan II missile explosion in Damascus, Ark. And popular films such as Stanley Kubrick’s 1964 Dr. Strangelove have played out how it could all go terribly wrong, as when General Jack D. Ripper becomes unhinged at the thought of a “Communist conspiracy to sap and impurify all of our precious bodily fluids” and orders a nuclear first strike against the Soviet Union. (continue reading…)

topics in this column: , ,

The Genesis of Justice

published May 2014 | comments (1)
Before all learning, an infant’s mind has a sense of
right and wrong
magazine cover

On the platform of a subway station, a woman and two men are talking a few feet away from the open track pit. Without warning, one of the men shoves the woman. She staggers backward toward the edge. The other man reaches out to catch her, but he is too late, and down she goes onto the tracks. In an instant, he reacts. He turns on his heels and coldcocks the culprit. It is a magnificent roundhouse to the face that snaps the wrongdoer’s head back. Satisfied with this act of revenge, he turns, hesitates and dashes over to pull the woman to safety. He reassures her, then takes off after the malefactor, who has beat a hasty retreat. The entire incident takes 20 seconds, and you can see it yourself on YouTube (at the 1:47 mark).

In that moment—too brief for rational calculation—a conflict of pure emotionality unfolds between rescue and revenge, helping and hurting. In a flash, two neural networks in the rescuer’s brain are engaged to act: help a fellow human in trouble or punish the perpetrator. What is a moral primate to do? In this case, because no train was coming, he could afford that problematic first choice. Rescue is sweet but so is revenge. (continue reading…)

topics in this column: , ,
next page »