Survivorship Bias
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.
Survivorship Bias
Definition: Survivorship bias refers to the tendency to view the performance of existing stocks or funds in the market as representative of the entire sample, while ignoring those that have already gone bankrupt. This bias can lead to an overestimation of historical performance and the general attributes of a fund or market index. Survivorship bias risk refers to the chance of making erroneous investment decisions based on published investment fund return data.
Origin:
The concept of survivorship bias can be traced back to World War II. Statistician Abraham Wald studied the distribution of bullet holes on returning aircraft and suggested reinforcing the areas without bullet holes, as planes hit in those areas had already crashed and could not return. This study revealed the basic principle of survivorship bias.
Categories and Characteristics:
Survivorship bias mainly falls into two categories: stock market survivorship bias and fund market survivorship bias. Stock market survivorship bias refers to considering only the performance of existing stocks while ignoring those that have been delisted. Fund market survivorship bias refers to considering only the performance of existing funds while ignoring those that have been closed or merged. Both types share the common characteristic of potentially leading to an overestimation of market performance.
Specific Cases:
Case 1: Suppose an investor invested in a group of tech stocks in 2000 and reviewed their performance in 2020. If he only considers the tech companies still in existence in 2020 (like Apple and Microsoft) and ignores those that have gone bankrupt (like Pets.com), his investment return rate may be overestimated.
Case 2: A fund company promotes its historical fund performance by only showcasing those funds that have performed well and are still in operation, while ignoring those that have been closed or merged. This practice may mislead investors into believing that the company's funds perform exceptionally well overall.
Common Questions:
Q: How can one avoid survivorship bias?
A: Investors can avoid survivorship bias by considering all relevant data, including stocks and funds that have gone bankrupt or been delisted. Additionally, using more comprehensive market indices and data sources can help reduce this bias.
Q: What impact does survivorship bias have on investment decisions?
A: Survivorship bias can lead investors to overestimate the historical performance of the market or funds, resulting in inaccurate investment decisions and increased investment risk.
