Survivorship Bias

Vitaliy_Kiselev

You must remind yourself that when you start to pick apart winners and losers, successes and failures, the living and dead, that by paying attention to one side of that equation you are always neglecting the other. If you are thinking about opening a restaurant because there are so many successful restaurants in your hometown, you are ignoring the fact that only successful restaurants survive to become examples. Maybe on average 90 percent of restaurants in your city fail in the first year. You can’t see all those failures because when they fail they also disappear from view. As Nassim Taleb writes in his book The Black Swan, “The cemetery of failed restaurants is very silent.” Of course the few that don’t fail in that deadly of an environment are wildly successful because only the very best and the very lucky can survive. All you are left with are super successes, and looking at them day after day you might think it’s a great business to get into when you are actually seeing evidence that you should avoid it.

http://youarenotsosmart.com/2013/05/23/survivorship-bias/

karl

Restaurant failure is an interesting example: Near the street where I work, there are many Restaurants. Amongst them a percentage of ~20% of locations which close and re-open under new ownership at an astonishing rate, while the other ~80% persist for much longer.

brianl

Why Does McDonald's persist? It's terrible.

karl

@brianl: Cheap ingredients, cheap labor, and a lot of people who prefer eating this terrible stuff instead of investing their time in cooking for themselves or their money in paying others to cook something better...

goanna

Why Does McDonald's persist?

McDonald's do their numbers. They choose a location with a demographic who buy their fast food, in a place easily accessible to that demographic and then they sell the franchise to somebody to run. It's real estate.

Vitaliy_Kiselev

They choose a location with a demographic who buy their fast food, in a place easily accessible to that demographic and then they sell the franchise to somebody to run.

I am not sure that it happens such way, as it is franchise thing. So, it is just people investing their money and using McDonald's tech and suppliers.

jleo

Some McDonald's franchises have gone broke. What happened at many in our city was the franchisees hired people who didn't speak english, kept getting orders wrong, argued with customers. And disregarding the fresh food guidelines served old reheated burgers and fish filets. Same thing happened with Burger King. All except two have shut down. They always served cold burgers! Unlike the original TV ad where they grill each burger when you order. Maybe McDonald's thrive because the food is bland...the food is simple on the palate, either salty or sweet. You could probably scare everyone out of McD's by throwing Jalapeño peppers all over the place!

goanna

The original item writer chose restaurants as a very good example - because restaurant maths are easy: for a given plate served, 1/3 is the cost of the ingredients, 1/3 is the staff and 1/3 is for the house. Anybody asking a bank to finance their future restaurant will have to show how these numbers will work in their case.

If you are thinking about opening a restaurant because there are so many successful restaurants in your hometown, you are ignoring the fact that only successful restaurants survive to become examples..

If people go broke, they're often going against that thirds rule, using their own money and trying their luck by wishful thinking.

jleo

Target is closing all of its stores in Canada after losing $5.4 billion. It will cost $600 million to close down.

Unlike U.S stores, the shelves were almost always half empty with no products on sale, the clothing dept had no mirrors or change rooms, etc. Most prices were also higher than competitors . Sounds like a North Korean dept store in The Interview :)

http://gawker.com/why-was-target-canada-such-a-disaster-1579554288

http://www.theglobeandmail.com/report-on-business/target-killing-canadian-operations/article22458161/

http://business.financialpost.com/2015/01/17/how-targets-grand-reveal-contributed-to-its-demise-in-canada/#__federated=1

goanna

Restaurants are only one way to show people's bias to believing in success. I always remember the one that takes the cake is the guy who drives a Ferrari and we all think he's rich - until the bank takes everything he owns. We liked to think he'd made enough money to afford that lifestyle - whereas he was very likely borrowing all the time, waiting for some financial win, desperate and knowing his time was up..

onion

This applies to the stock market as well - indices climb upwards with brokers promoting this as proof that buying individual stocks is worthwhile. The companies that make up the index survive or fail, with the failures replaced by new companies.

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