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The Internet is brimming with resources that proclaim, “nearly everything you believed about investing is incorrect.” However, there are far fewer that aim to help you become a better investor by revealing that “much of what you think you know about yourself is inaccurate.” In this series of posts on the psychology of investing, I will take you through the journey of the biggest psychological flaws we suffer from that causes us to make dumb mistakes in investing. This series is part of a joint investor education initiative between Safal Niveshak and DSP Mutual Fund.
Imagine an eccentric (and bored) tycoon offering you $10 million to play Russian roulette… Five of the six histories would lead to enrichment; one would lead to a statistic… The problem is that only one of the histories is observed in reality.
— Nassim Taleb, Fooled by Randomness
We are a story-driven species. From cave walls to balance sheets, we look for narratives that explain the world and our place in it. And nowhere is this tendency more dangerous than when we only learn from the winners. When we allow survival alone to imply superiority. When the fact that someone or something made it through becomes enough proof that they knew what they were doing.
This is the essence of survivorship bias, and in the world of investing, it distorts almost everything.
Consider the stock market, which is full of visible winners. We often hear stories of stocks that went 20x, fund managers who outperformed for a decade, companies that pivoted into success, and investors who became celebrities.
These survivors are everywhere. They dominate the headlines and shape our mental models of what success looks like.
But what about the others? The ones who didn’t make it? The companies that failed while no one noticed? The investors who blew up and left the game? They’re barely mentioned, rarely studied, and almost never remembered. And so, the narrative we inherit is hopelessly incomplete.
That’s how the illusion begins. We think we’re learning how the game is played, but we’re only learning from those still at the table. It’s like observing only the planes that returned from battle, and deciding where to reinforce the armour, without thinking about the ones that never came back (read more on this story).
Now, the problem isn’t just that we miss some data. It’s that the very nature of the data we do see is skewed. The lesson is baked into a biased sample, and yet we treat it as universal.
Take stock indices, for example. The Sensex and Nifty have risen beautifully over decades. Charts show a neat upward slope that seems to confirm the timeless wisdom: stay invested, and you’ll win. But hidden beneath that slope is a continuous yet quiet rotation. The companies that underperform are removed. The failures are dropped. Only the stronger firms remain.
So, what looks like the resilience of the market is partly a survivor effect. The index is constantly pruned to remove the weak. Most investors never see this. They think the index is a static entity, forgetting that the reason it looks so strong is because it has been carefully rebalanced to ensure it does.
It’s not a lie, but it’s not the whole truth either. It’s a curated version of reality, which is designed for survivorship.
Now apply that same lens to mutual funds. Every year, we see ads highlighting top performers over 5- or 10-year periods. Investors chase these funds, believing they’ve found consistent outperformance. But most people never ask how many funds even survived those 10 years. Many didn’t.
The underperformers were shut down, merged away, or quietly buried under new scheme names. Their poor returns don’t make it into the “top fund” ads. Which means the average performance of surviving funds is often inflated, because the worst results were deleted from the data set.
So, when we look back at long-term fund returns without adjusting for those that disappeared, we’re not seeing how fund managers truly performed across the board. We’re seeing how the winners performed and mistaking it for the average.
And then there’s the most seductive arena of all: success stories. Business books, biographies, and podcast interviews are all proudly built on the same question: “How did you do it?”
But that question, when asked only of survivors, creates a dangerous narrative. It turns randomness into wisdom and luck into method.
A founder who succeeded against all odds is praised for her vision, her grit, and her intuition. But what about the 100 others who had the same qualities and failed? What about the timing, the macro conditions, the investor interest, the random tailwinds that no one could have planned?
None of that gets included in the final story. And so we start to think: this is how success works. This is the roadmap. Just do what she did.
In investing, we see this with concentrated portfolios. Someone puts 40% of their wealth in a single stock, and it works. Suddenly, it’s a genius move. People quote Charlie Munger’s love for “few bets, big bets, infrequent bets.” What they don’t quote are the countless investors who did the same thing and lost everything. Because they’re gone. Because their voices aren’t around.
Survivorship bias also affects how we view risk. When risky behaviour pays off, it’s reframed as boldness or foresight. But when it doesn’t, there’s no reframing…just silence.
The lesson that reaches the public, though, is clear: take bold bets. It worked for him, it could work for you. But that’s the equivalent of watching five Russian roulette winners and deciding the game must be safe.
As Taleb says, it’s not just faulty logic but a fatal logic. The danger isn’t always visible. And that’s what makes it so appealing.
Even the gurus we learn from, like Warren Buffett and Peter Lynch are often outliers. They had the skill, yes. But also timing, temperament, and a unique mix of circumstances. When they explain their principles, it’s tempting to think those principles are universally repeatable. But what we don’t see are the thousands who tried similar approaches and didn’t beat the market.
The base rate gets ignored. The framework gets deified. And we forget that sometimes, even the right decisions lead to the wrong results. Because markets aren’t fair judges of effort. They’re chaotic and slow to reward insight.
Survivorship bias also has a cruel psychological effect. It makes failure feel personal. When everyone you follow seems to be doing well, when the articles are full of people making crores, and when every podcast features someone who spotted a multi-bagger early, it’s easy to feel like you’re behind. That you missed the boat and you’re not as smart.
But the truth is, you’re not seeing “everyone.” You’re seeing only those who are still in the game. The ones who stayed quiet after their bad decisions or investments aren’t in the room. The ones who made the same bets as the winners, but at the wrong time or with the wrong stock, aren’t being interviewed. And so we compare ourselves not to the market, but to the most visible and successful examples within it.
It’s not a fair comparison. But our minds don’t know that.
So, the question now is: how do we protect ourselves from this distortion?
First, learn to ask better questions. Not “What worked?” but “What else was tried that didn’t?” Not “How did this person succeed?” but “How many tried this path and failed?”
Second, remind yourself that most of what you see is filtered. Most stories are success stories because those are the ones that get told. Failure is often just as instructive, sometimes more so, but it rarely gets a voice.
Third, ground yourself in base rates. If only 5% of microcaps become smallcaps or midcaps, then every story of that happening needs to be understood in that context. You can still bet on microcaps, but bet with awareness, not illusion.
And finally, the most important of it all, stay humble. Success is fragile. And even the survivors, if they’re honest, will admit that they were often just one decision, or one crisis, away from not making it.
All in all, survivorship bias doesn’t just skew how we think about investing. It skews how we think about effort, risk, process, and even identity. It makes us think we know more than we do, simply because we’ve only seen the stories that ended well. But the real lessons often lie in what we’ll never see, of the businesses that almost made it or the people who did everything right and still lost.
Those stories are gone. But the silence they left behind should teach us something too.
Two Books. One Purpose. A Better Life.
“Discover the extraordinary within.”
—Manish Chokhani, Director, Enam Holdings
“This is a masterpiece.”
—Morgan Housel, Author, Psychology of Money
Disclaimer: This article is published as part of a joint investor education initiative between Safal Niveshak and DSP Mutual Fund. All Mutual fund investors have to go through a one-time KYC (Know Your Customer) process. Investors should deal only with Registered Mutual Funds (‘RMF’). For more info on KYC, RMF & procedure to lodge/ redress any complaints, visit dspim.com/IEID. Mutual Fund investments are subject to market risks, read all scheme related documents