Survivorship Bias Risk Definition
What is the risk of survival bias?
The risk of survival bias is the possibility that an investor will make the wrong investment decision based on published investment fund performance data that reflects only performing funds rather than all funds.
Key points to remember
- Risk of survival bias is the risk that reported returns for investment funds are overly optimistic because failing funds are systematically selected from available data.
- Survival bias is a more general bias that can apply in many contexts, but is of particular interest to investors.
- Survival bias and the associated risks should be carefully considered before buying a fund.
Understanding the Risk of Survival Bias
Risk of survival bias is a type of risk based on the concept of survival bias, sometimes also referred to as “survival bias”. This is a phenomenon that can occur in a variety of contexts. It involves evaluating a situation or drawing conclusions based solely or primarily on people or things that are prominent or visible at the time. This usually happens after some sort of selection or separation process.
Survival bias is a problem when the characteristics of survivors differ systematically from the characteristics of the entire original population or target audience. This normally happens because the selection process is not random, but is biased in some way for or against certain traits, characteristics, or behaviors.
In an investment context, the risk of survival bias can arise when investment fund performance data is excessively high because a company’s poorly performing funds are closed and their returns are not included in the data. In this case, data specifically related to these funds has already been filtered out, producing an inaccurate and incomplete picture of a company’s overall fund performance.
The danger in this scenario is that the investor will not actually see the returns he anticipates because he has based his investment decision on incomplete and misleading information. If potential investors are told only about the returns of funds that perform well, and not about the lower or negative returns experienced by funds that have been closed, then they will have an overly optimistic view of the potential returns they can expect.
Risk of Survival Bias and Other Risks
The risk of survival bias is one of many reasons why investors should not rely too heavily on past performance when making investment decisions. This is especially true if investors are looking at a very limited period in the fund’s history, as there may have been abnormal incidents or unusual events that affected the fund’s performance during that time. It’s also possible that a group of investors had luck on their side at the time, and of course there’s no guarantee that the luck they had will happen again.
The risk of survival bias is just one example of the different types of risks an investor should consider when making investment decisions or planning their long-term strategy. Investors should also consider the related types of risk in an investment fund. Other types of survival bias risks that investors may encounter are:
- Risk of non-reporting bias, which is the danger that overall returns are wrong because some funds, probably the worst performers, refuse to report their returns;
- Risk of instantaneous historical bias, which is the possibility that fund managers choose to report performance to the public only when they have established a track record of success with a fund, while ignoring funds that have not successful.
In addition to past performance, investors should consider factors such as cost, risk, after-tax returns, volatility, relationship to benchmark performance, etc.
