What is 'Sample Selection Bias'

Sample selection bias is a type of bias caused by choosing non-random data for statistical analysis. The bias exists due to a flaw in the sample selection process, where a subset of the data is systematically excluded due to a particular attribute. The exclusion of the subset can influence the statistical significance of the test, or produce distorted results.

BREAKING DOWN 'Sample Selection Bias'

Survivorship bias is a common type of sample selection bias. For example, when back-testing an investment strategy on a large group of stocks, it may be convenient to look for securities that have data for the entire sample period. If we were going to test the strategy against 15 years worth of stock data, we might be inclined to look for stocks that have complete information for the entire 15-year period. However, eliminating a stock that stopped trading, or shortly left the market, would input a bias in our data sample. Since we only include stocks that lasted the 15-year period, our final results would be flawed, as these performed well enough to survive the market.

Hedge fund performance indexes are one example of sample selection bias subject to survivorship bias. Because hedge funds that don’t survive stop reporting their performance to index aggregators, resulting indices are naturally tilted to funds and strategies that remain, hence “survive.” This can be an issue with popular mutual fund reporting service as well.

Analysts can adjust to take account of these biases but may introduce news biases in the process.

RELATED TERMS
  1. Bias

    Biases are human tendencies that affect our behavior and perspective, ...
  2. Look-Ahead Bias

    Look-ahead bias occurs when information or data is used in a ...
  3. Instant History Bias

    An instant history bias is a reporting accuracy issue created ...
  4. Outcome Bias

    Outcome bias is an error made in evaluating the quality of a ...
  5. Sampling

    A process used in statistical analysis in which a predetermined ...
  6. Survivorship Bias Risk

    The possibility that an investor will make a misguided investment ...
Related Articles
  1. Investing

    5 Mental Mistakes That Affect Stock Analysts

    They know more about stocks than the average person, but analysts are still affected by biases. Find out what they are.
  2. Investing

    9 Cognitive Biases That Affect Your Business

    Human beings often act irrationally when it comes to business decisions. Behavioral finance explains the difference between what we should do and what we do.
  3. Investing

    Is Your Wealth Advisor an Investment Vulcan?

    Research shows that investments managed by financial advisors perform better. Why?
  4. Financial Advisor

    Behavioral Finance: How Bias Can Hurt Investing

    Here are three cognitive biases from behavioral finance that investors would do well to be aware of to avoid making poor investment decisions.
  5. Investing

    Charles Schwab: How Confirmation Bias Can Hurt Your Investment Decisions

    Confirmation bias can result in bad investment decisions. Charles Schwab lays out how to avoid the phenomenon.
  6. Investing

    Is Biased Investing Holding You Back?

    Risk aversion seems to come to us naturally, preventing us from stepping into unfamiliar territory. But feeling comfortable isn't always the best thing for your portfolio.
  7. Investing

    Soros, Branson Say Brexit is Doomsday

    What kind of impact will the U.K's Brexit decision have on world markets? Some leading investors think it spells doom for the global economy.
  8. Trading

    The art of cutting your losses

    Taking corrective action before your losses worsen is always a good strategy. Find out how to keep your capital losses small and let your winners run.
  9. Insights

    Trump Fights Media Bias By Launching Biased Live-Stream Show (FB)

    The campaign is looking to fight media bias by taking the idea to the extreme - a show by and for the campaign.
RELATED FAQS
  1. What percentage of the population do you need in a representative sample?

    Learn about representative samples and how they are used in conjunction with other strategies to create useful data with ... Read Answer >>
  2. What is the difference between systematic sampling and cluster sampling?

    Learn about the differences between systematic sampling and cluster sampling, including how the samples are created for each ... Read Answer >>
  3. When is it better to use systematic over simple random sampling?

    Learn when systematic sampling is better than simple random sampling, such as in the absence of data patterns and when there ... Read Answer >>
  4. What are the disadvantages of using a simple random sample to approximate a larger ...

    Learn what a simple random sample is, how researchers use it as a statistical tool and the disadvantages it carries when ... Read Answer >>
  5. What are the advantages and disadvantages of using systematic sampling?

    Learn about the primary advantages and disadvantages of using a systematic sampling method when conducting research of a ... Read Answer >>
Hot Definitions
  1. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  2. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  3. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  4. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  5. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  6. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
Trading Center