What is Survivorship Bias Risk

Survivorship bias risk is the chance of an investor making a misguided investment decision based on published investment fund return data.

BREAKING DOWN Survivorship Bias Risk

Survivorship bias risk is a type of risk based on the concept of survivorship bias, sometimes also known as “survival bias.” This is a phenomenon that can happen in a variety of contexts. It involves evaluating a situation or drawing conclusions based solely or mainly on people or things that are prominent or visible at that time. This is usually after some sort of selection or separation process has occurred.

In an investing context, survivorship bias risk can occur when the published investment fund return data is unrealistically high because a company's poorly performing funds are closed and their returns are not included in the data. In this case, the data specifically related to those funds has already been weeded 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 they anticipate because they have based their investment decision on incomplete and misleading information.

Survivorship Bias Risk and Other Risks

Survivorship bias risk is one of many reasons why investors should not rely too heavily on past returns to make their investment decisions. This is particularly true if investors are looking at a very limited period of time in the fund’s history, as there may have been some abnormal incident(s) or unusual occurrences that affected the fund’s performance during that window of time. There is also the chance that a group of investors just happened to have luck on their side at that time, and of course there is not guarantee that the luck they experienced will repeat itself.

Survivorship bias risk is just one example of the various types of risk an investor must consider when making investment decisions or planning their long-term strategy.

Other types of risk that investors might encounter are:

  • Non-reporting bias risk, which is the danger that overall returns are misstated because some funds, likely the poorly performing ones, decline to report their returns;
  • Instant history bias risk, which is the possibility that fund managers may choose to report performances to the public only when they have established a track record of success with a fund, while leaving out unsuccessful funds.

In addition to past performance, investors should consider factors such as cost, risk, after-tax returns, volatility, relationship to benchmark performance and more.