Survivorship Bias in Investing

Understanding Survivorship Bias

Survivorship bias leads us to overestimate success rates because we only see the survivors. In investing, this manifests when:

• Mutual fund performance data excludes funds that closed
• Startup success stories ignore the thousands that failed
• Backtests only include stocks that still exist today

The key formula for calculating the probability of survival over time:

P(survival) = (annual survival rate)^{number of years}

Where:

• P(survival) = Probability a fund survives the entire period
• annual survival rate = Chance of surviving one year (as decimal)
• number of years = Length of the time period

This simulation shows how focusing only on surviving funds dramatically overstates average performance. The reality includes many more failures that disappear from the data.