DEFINITION of Look-Ahead Bias
Look-ahead bias occurs by using information or data in a study or simulation that would not have been known or available during the period being analyzed. This will usually lead to inaccurate results in the study or simulation. Look-ahead bias can be used to sway simulation results closer into line with the desired outcome of the test.
BREAKING DOWN Look-Ahead Bias
To avoid look-ahead bias, if an investor is backtesting the performance of a trading strategy, it is vital that he or she only uses information that would have been available at the time of the trade. For example, if a trade is simulated based on information that was not available at the time of the trade - such as a quarterly earnings number that was released three months later - it will diminish the accuracy of the trading strategy's true performance and potentially bias the results in favor of the desired outcome. Look-ahead bias is one of many biases that must be accounted for when running simulations. Other common biases are sample selection bias, time period bias, and survivorship bias. All of these biases have the potential to sway simulation results closer into line with the desired outcome of the simulation, as the input parameters of the simulation can be selected in such a way as to favor the desired outcome.