Survivorship Bias Is a Serious Potential Problem in Drawing Conclusions

question 14

Essay

Survivorship bias is a serious potential problem in drawing conclusions from historical track records. Show why the following statements can be misleading:
a. "There are today 100 Type-A hedge funds in operation. Their average return over the past two years is 20%. Hence, they have outperformed the stock market (return of 15%)" [actually, some 50 funds disappeared during these two years].
b. "The Poupou commodity index has been back-calculated from 1970 to 1990 using the leading commodity futures contracts; by leading we mean those that have been most active. The Poupou commodity index had a remarkable performance from 1970 to 1995" [actually, several commodity futures contracts have been removed from the commodity exchange or have experienced a drop in trading activity].

---

Definitions:

Economic Options

The various choices available to individuals, businesses, and governments regarding the consumption, investment, and distribution of resources.

Sociological Imagination

The ability to see the relationship between individual experiences and the larger society, understanding personal issues as part of complex societal and historical forces.

Social Forces

Complex societal factors such as norms, laws, and cultural values that influence individuals' behaviors and interactions within society.

Anomic Suicide

A type of suicide that occurs when an individual feels disconnected from society due to a breakdown in social norms or a lack of social regulation.