“The most famous example of survivorship bias dates back to World War Two. At the time, the American military asked mathematician Abraham Wald to study how best to protect airplanes from being shot down. The military knew armour would help, but couldn’t protect the whole plane or would be too heavy to fly well. Initially, their plan had been to examine the planes returning from combat, see where they were hit the worst – the wings, around the tail gunner and down the centre of the body – and then reinforce those areas.
But Wald realised they had fallen prey to survivorship bias, because their analysis was missing a valuable part of the picture: the planes that were hit but that hadn’t made it back. As a result, the military were planning to armour precisely the wrong parts of the planes. The bullet holes they were looking at actually indicated the areas a plane could be hit and keep flying – exactly the areas that didn’t need reinforcing.” explains the BBC
In the world of investing, survivorship bias is profound. Poorly performing funds are often closed down. As such, you can’t see them in the data. Vanguard says “Survivorship bias matters because it can distort performance figures significantly. Survivorship bias tends to distort data in only one direction, by making the results seem better than they actually are. This is because fund closures are often a result of underperformance.”
Whilst everyone is told not to let past performance guide your decisions, inevitably so many people do look at past performance. Perhaps when you do, it’s worthwhile digging deeper to understand whether performance is actually overstated.