Survivorship bias

Survivorship bias happens when a group being studied only includes the entities that made it through some selection process, while the ones that failed or disappeared are left out entirely, which makes the group as a whole look more successful than it really was. In investing, this shows up most often when judging mutual funds, hedge funds, or trading strategies, since funds that perform badly tend to shut down and disappear from databases, leaving mostly the winners visible.

This distorts how good an entire investment strategy or fund category looks in hindsight. If a fund category had a fifty percent failure rate over ten years, but the failed funds are simply removed from performance databases rather than counted as losses, the average return of the funds still standing will look considerably better than what an investor who actually invested across the whole category at the start would have experienced.

The same distortion applies to stocks and to inspirational stories about business success generally, popular narratives about a small number of hugely successful companies or investors can create the impression that a strategy works reliably, when in fact the same approach may have quietly failed for a much larger number of companies or investors who never became famous enough to be studied. Checking whether a track record includes failed and discontinued entities, not just the survivors, is the key defense against being misled by this bias.