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Survivorship Bias Definition
Survivorship bias is a type of selection and cognitive bias that occurs when “survival” is used as a metric for making vital decisions. It is an error that occurs when people or things that survived certain processes and stages and given attention, thereby disregarding those that did not.
Survivorship bias can also occur in the financial market, this is when the performance of existing funds is used as a representation of all funds in the market. Survivorship bias can lead to wrong conclusions and selections.
A Little More on What is Survivorship Bias
Survivorship bias is both a selection and logical (cognitive) error that occurs when “survival” is used as a singular factor for determining the success of a thing or making conclusions. Survivorship bias often occurs when the historical data, past successes and general attributes of a person, fund or thing is considered in a selection process.
Visibility is an important factor in survivorship bias, a highly visible fund in an investment market, for instance, can be considered as a representative sample of the entire market. Other funds that are not visible in the market are not considered in the selection process.
Closing of funds remains a major reason for the occurrence of survivorship bias. In survivorship bias, items that are placed at the forefront are considered over others regardless of why other items are closed or not visible. In the investment market, fund managers close funds for various reasons, such as the performance of the fund, among other reasons. Survivorship bias, therefore, occur when items (funds) are closed and only a few are visible, the visible ones are biasedly selected over others.
Survivorship bias affects the performance of assets and funds in the market, whether directly or indirectly, this is a factor investors need to pay attention to.
Closing to New Investors
A closed fund is a type of fund which closes to new investors once a certain investment limit is reached, this type of fund also close to new investments made by existing investors. When a fund manager decides to close a fund to new investors, it may be there there is too much investment in the fund that can be effectively managed. Closing a fund to a new investor is called partial closing while closing a fund to both new and existing investors is full closing. This is a common attribute of closed mutual funds.
References for “Survivorship Bias”