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A made-up report looks at investment funds that began 10 years ago…
Contributed by StemPy LabTry it on paper first. A hint, the key idea and the worked solution are here when you need them.
A made-up report looks at investment funds that began 10 years ago. Of the 50 funds that began, 30 closed after poor results, and only 20 are still open today. The 20 open funds grew by a mean of a year. While they were open, the 30 closed funds had a mean growth of a year. The report says, "The average fund grew by a year." Name the bias. Find the mean yearly growth of all 50 funds. By how many percentage points does the report overstate it?
Need a reminder? The key ideaShow
Bias is a slant in the way a sample is chosen. If of a population are easy to reach and the survey asks only them, it finds their view , while the truth is . The gap is the bias, in percentage points.
The worked solution
Have you tried it?
Work it out on paper first. It is fine to get stuck or make a mistake: that is how we learn. When you are ready, go through the solution one step at a time, and check each step against your own.
Step 1. The bias. The report studies only the funds still open. The funds that did badly closed and dropped out of the picture. This is survivorship bias.
Step 2. The mean of all 50. a year.
Step 3. The gap. percentage points.
Answer: survivorship bias. The mean of all the funds is a year, so the report overstates it by percentage points.
Watch out. This is a simple model: it treats each fund equally and uses the closed funds' growth while they were open. The point stays the same. Leaving out the failures always makes the survivors look like the rule.
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