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Someone once said that failure is your greatest teacher.
However, it’s success stories that are used as blueprints for the way things should be done.
Failures become invisible.
Successes more visible.
Enter ‘survivorship bias’, explained in under 3 minutes with our latest video.
Examples of survivorship bias are all around us.
In finance, it's the tendency for failed companies to be excluded from performance studies because they no longer exist.
During World War II, the statistician Abraham Wald famously took survivorship bias into his calculations when considering how to minimise bomber losses to enemy fire (believing those planes which did not return from battle should be examined, not observing the bullet holes on those which did).
But where is survivorship bias visible when it comes to investing?
Through actively managed funds.
In short, most comparisons between active and passive fund performance are not adjusted for survivorship bias.
And this is a serious issue.
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