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].

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Definitions:

Orientation of Locus

The focus or positioning of control believed by a person to reside either internally within themselves or externally in the environment.

College Students

Individuals enrolled in a college or university program, who are often subject to unique social, academic, and developmental experiences.

Internal

Relating to or situated on the inside; internal processes or factors occur within an entity or organization.

Depressed Mothers

Women experiencing depression during pregnancy, after childbirth, or at any point of motherhood, affecting their emotional well-being and parenting.