What is Survivorship Bias?
1492 reads · Last updated: December 5, 2024
Survivorship bias or survivor bias is the tendency to view the performance of existing stocks or funds in the market as a representative comprehensive sample without regarding those that have gone bust. Survivorship bias can result in the overestimation of historical performance and general attributes of a fund or market index.Survivorship bias risk is the chance of an investor making a misguided investment decision based on published investment fund return data.
Definition
Survivorship bias refers to the tendency to view the performance of existing stocks or funds in the market as representative of a comprehensive sample, while ignoring those that have already failed. This bias can lead to an overestimation of historical performance and the general attributes of funds or market indices.
Origin
The concept of survivorship bias originated in statistics and finance, first identified in the mid-20th century. Researchers noticed that when analyzing stock market and fund performance, there was a tendency to overlook companies or funds that had exited the market, leading to biased data analysis.
Categories and Features
Survivorship bias can be categorized into two main types: bias in individual stocks or funds, and bias in market indices. Bias in individual stocks or funds occurs when investors focus only on existing successful cases, ignoring the failures. Bias in market indices is reflected in the adjustment of index components, typically retaining only well-performing companies.
The main feature of this bias is an overly optimistic assessment of historical performance, which may lead investors to have unrealistic expectations about the future performance of the market or funds.
Case Studies
A typical case is the Nasdaq index during the tech bubble. Many tech companies went bankrupt after the bubble burst, but the success of surviving companies like Amazon and Apple overshadowed the overall market risk. Another example is the hedge fund industry, where many funds close during market volatility, but the surviving funds often perform well, attracting more investors.
Common Issues
Investors often mistakenly believe that existing successful cases represent the overall market performance, ignoring the impact of failures. To avoid survivorship bias, investors should consider all possible outcomes, including failed cases.
