Is “survivor bias” an underlying aspect of financial information? Quite likely, and that can lead to unwarranted conclusions.
Suppose you interviewed 100 successful people in any calling, maybe real estate salespeople. How many would be passionate about what they do? Probably most of them.
Does that mean passion is a fundamental aspect of success? Maybe and maybe not. You are not seeing the entire population of all possible situations. If you interviewed 1,000 such people, 900 of whom did not do well, it is possible that the rate of passion would not be different among the 900. If so passion is not an indicator.
If the rate was much less you would still need to discover this, “Does passion come before or after success?”
In many cases it comes after, so passion is not a condition precedent to success.
The same survivor bias is found in investment managers. Most investment managers are invisible, so when we see that some are in the bottom quintile, we should not assess them as “Not good”. Instead we should say, “Of all the ones who still survive, these are the least good based on some metric.”
It is like the NBA. There are roughly 500 players in the league. The 500th best of them is a nearly super-human basketball player by general population standards. When looking at players in the NBA, notice that all recreational players are invisible.
Invisible investment managers includes all the do-it-yourself group and they have a consistently spotty record. Maybe the folks in the bottom quintile are actually in the top 1% if you saw all the managers.
The invisible managers still generate data found in the various indices. If most do “shockingly badly” as Blackrock claims, then why should I believe that a competent manager cannot beat the index. As more people become their own manager, that should become easier. In fairness they may get better, but that is not the way to bet. Investing successfully is a long way from being an intuitive, part-time job.
Survivor bias is a particular form of end point bias, so be careful.
Be sure you are seeing all the data before you ascribe meaning to what you do see. If some data is missing, be aware of that and adjust your confidence in the answer.
Interpretating data is only to help you understand meaning. If information does not support meaning, you are better off without it.
Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.