Survivorship bias
The upward tilt from studying only the funds or firms that still exist, because the failures have dropped out of the database. It flatters average performance and understates risk.
Where you will meet it
Survivorship bias appears in 11 learning outcomes on the CFA syllabus. A few of them:
- Contrast ways of sampling and explain sampling error
“In finance the biases that bite hardest are survivorship — measuring only the funds that still exist — and look-ahead, using information that was not available at the time.”
- Set out how the main asset classes have performed historically in terms of risk and return
“And long records drawn from one successful market carry survivorship bias.”
- Explain why hedge fund index returns as reported can be biased
“Survivorship bias removes funds that closed, which are disproportionately the poor performers.”
- Spot flaws in the backtest of a strategy
“Survivorship bias arises when the data include only firms that still exist, which lifts returns.”
Practise it
Practise survivorship bias until it is automatic: questions that explain every wrong option.
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