What is 'Survivorship Bias'

Survivorship bias is the tendency to view the fund performance of existing funds in the market as a representative comprehensive sample. Survivorship bias can result in the overestimation of historical performance and general attributes of a fund. Survivorship bias may also be known as "survivor bias."

BREAKING DOWN 'Survivorship Bias'

Survivorship bias is a natural singularity that makes the existing funds in the investment market more visible and therefore more highly viewed as a representative sample. Survivorship bias occurs because many funds in the investment market are closed by the investment manager for various reasons leaving existing funds at the forefront of the investing universe.

Funds may close for various reasons. Numerous market researchers follow and have reported on the effects of fund closings, highlighting the occurrence of survivorship bias. Market researchers regularly follow fund survivorship bias and fund closings to gauge historical trends and add new dynamics to fund performance monitoring.

Fund Closings

There are two main reasons that funds close. One, the fund may not receive high demand and therefore asset inflows do not warrant keeping the fund open. Two, a fund may be closed by an investment manager due to performance. Performance closings are typically the most common.

Investors in the fund are immediately impacted by a fund closing. Company’s usually offer two solutions for a fund closing. One, the fund undergoes full liquidation and the investors’ shares are sold. This causes potential tax reporting consequences for the investor. Two, the fund may choose to merge. Merged funds are often the best solution for shareholders since they allow for special transition of shares typically with no tax reporting requirements. However, the performance of the merged funds is therefore also transitioned and can be a factor in the discussion of survivorship bias.

Morningstar is one investment service provider that regularly discusses and reports on survivorship bias. It can be important for investors to be aware of survivorship bias because it may be a factor influencing performance that they are not aware of. While merged funds may take into account closed fund performance, in most cases funds are closed and their performance is not integrated in future reporting. This leads to survivorship bias, since investors may believe that currently active funds are a true representative of all efforts to manage toward a specific objective historically. Thus, investors may want to include qualitative fund research on a strategy they are interested in investing in to determine if previous managers have tried and failed in the past.

Closing to New Investors

Funds may close to new investors which is very different than a full fund closing. Closing to new investors may actually be a sign of the popularity of the fund and attention from investors for above average returns. To learn more about new investor closings see Closing Mutual Funds: Investment Protection or Trap?

Survivorship Bias Research

Numerous studies have been done discussing survivorship bias and its effects. In 2017, Morningstar released a research report titled “The Fall of Funds: Why Some Funds Fail” discussing fund closures and their negative consequences for investors.

RELATED TERMS
  1. With Benefit of Survivorship

    With benefit of survivorship describes a situation in which ownership ...
  2. Confirmation Bias

    Confirmation bias suggests that investors seek out information ...
  3. Outcome Bias

    Outcome bias is an error made in evaluating the quality of a ...
  4. Home Bias

    Home bias is the tendency for investors to over-invest in domestic ...
  5. Comparison Universe

    A comprehensive grouping of investment managers with similar ...
  6. Closed To New Accounts

    When an investment vehicle is no longer accepting new investors, ...
Related Articles
  1. Investing

    Mutual Fund Returns: Not Always What They Appear

    Survivorship bias erases substandard performers, distorting overall mutual fund returns.
  2. Investing

    Behavioral Bias: Cognitive Versus Emotional Bias in Investing

    We all have biases. The key to better investing is to identify those biases and create rules to minimize their effect on investing decisions.
  3. Retirement

    How Survivorship Life Insurance Works

    Should you buy a survivorship life insurance policy?
  4. 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.
  5. Financial Advisor

    Behavioral Finance Tips for Advising Your Clients

    Here's how advisors can prevent clients from making irrational investment decisions.
  6. Investing

    4 Investing Biases You Should Avoid

    Don't let these four behavioral biases interfere with your investment strategy and financial success.
  7. Investing

    4 Biases That Can Make You A Bad Investor

    Find out how to spot these four biases, and start making more logical investing decisions.
  8. Investing

    Why Hedge Funds Do Not Belong in Your Portfolio

    Considering hedge funds as part of your investment strategy? Make sure you understand all the risks and fees involved.
  9. Investing

    Closing Mutual Funds: Investment Protection Or Trap?

    Discover the characteristics of closing funds, the reasons why they close and key factors to consider.
  10. Investing

    Liquidation Blues: When Mutual Funds Close

    Underperforming mutual funds can be liquidated, leaving investors down and out.
RELATED FAQS
  1. Can I collect Social Security if I still have a job?

    Find out about some circumstances that would allow you to collect Social Security while you're working and how your benefits ... Read Answer >>
  2. 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 >>
Hot Definitions
  1. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  2. Quick Ratio

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

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

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  5. 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 ...
  6. Relative Strength Index - RSI

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