Author Topic: Be careful of survivorship bias  (Read 4789 times)

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Be careful of survivorship bias
« on: August 17, 2010, 10:10:10 pm »
I was recently evaluating a trading system for the ASX200.  The system picked stocks that had extreme falls over a medium to short time-frame. The idea was that stocks that fall sharply generally have some sort of recovery after the drop. This system actually worked well in the back-tester but the problem with it was that the ASX200 only had stocks in it that didn't go down enough to be taken of the list or go bankrupt.

Quote from: Wikipedia
Survivorship bias can lead to overly optimistic beliefs because failures are ignored, such as when companies that no longer exist are excluded from analyses of financial performance. It can also lead to the false belief that the successes in a group have some special property, rather than being just lucky. For example, if the three of the five students with the best college grades went to the same high school, that can lead one to believe that the high school must offer an excellent education. This could be true, but the question cannot be answered without looking at the grades of all the other students from that high school, not just the ones who "survived" the top-five selection process.