I am not getting the difference between Survivor ship bias and look ahead bias
Can anyone shed some light for me?
Survivorship bias is when you exclude companies from your analysis that were available as investments during your analysis period. For example, if you used a list of stocks from today to compute the total return over the last 5 years it would likely be overstated because all of the companies that went bankrupt during that period are not in your calculation.
Look ahead bias is different in that it is when your analysis assumes data that was not actually available. For example, if you were using 12/31/19 financial statements for your analysis assuming they were available on that date you have a look ahead bias. Those financial statements probably were not made public until a few months after that date.
So look ahead bias pertains to the information about the company?
Not necessarily.
As an interesting example, many years ago the Wall Street Journal had an article about a simple, three-fund portfolio that would have outperformed the S&P 500 over the previous 5 years (or maybe 10 years, or maybe 15 years; it was a long time ago): a US stock fund, a US bond fund, and an international stock fund.
The international stock fund had returned something like 15% per year over the 5- (or 10- or 15-) year period in question. The problem is that at the time you would have had to create that portfolio, nobody would have suggested that fund, because for the previous 5 (or 10 or 15) years its annual return had been something like 2%.
Suggesting that fund involved look-ahead bias: we know now that it would have been a good choice, but you wouldn’t have known then.
Will Rogers’ investment advice is a classic example of look-ahead bias:
“Take all your money and buy a good stock, wait for it to go up, then sell it. If it don’t go up, don’t buy it.”
Hello. I dont get why indexes do not have survivorship bias. From my point of view, since the company can not longer be in the index, there is clearly survivorship bias. Can please someone confirm / explan?
Thanks in advance
They’re not talking about indices in general; they’re talking specifically about broad market indices. When a company drops out of, say, the S&P 500, it’s not that the company went belly up; it’s simply that another got a little bit bigger.
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