Survivorship Bias

Survivorship Bias

Specifically in the context of mutual funds, the tendency for poor performers to drop out while strong performers continue to exist. This results in an overestimation of past returns.

Notes:

For example, a mutual fund company's selection of funds today will include only those that have been successful in the past. Many losing funds are closed and merged into other funds to hide poor performance. This is an important issue to take into account when analyzing past performance.

Also known as "survivor bias."

See also: Mutual Fund, Window Dressing

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Survivorship bias

Usually pertaining to fund manager or individual investor performance. Suppose we examined the performance over the last ten years of a group of managers that exist today. This performance is biased upwards because we are only considering those that survived for 10 years. That is, some dropped out because of poor performance. Hence, in evaluating performance, one has to be careful to include both the current and the managers that dropped out of the sample due to poor performance.