The Olympic Games and Survivorship Bias
I have a confession to make. I don’t golf and I don’t ski. I am, however, a target archery enthusiast. I like that it is a sport that rewards concentration over speed, strength, and athleticism. I also like the near instantaneous feedback that it provides when it comes to performance measurement: it takes barely more than a second to know exactly where the arrow has landed on the target.
The Olympic Games currently underway give me a rare opportunity to enjoy watching the world’s very best archers. Unfortunately, the archery competition does not get as much media coverage as swimming, track and field, gymnastics, or beach volleyball. The problem with archery is that it is not suited for television. The action is repetitive, there is rarely any drama, the crowd is completely silent - irrespective of what happens -, and the athletes themselves are unknown to most as they do not have huge sponsorship deals. To make things worse, the competition, as displayed on television, does not give a good idea of the target’s distance or size[1] because it typically shows a vertically split screen with a motionless archer on the left and the target on the right, as if the two were disconnected.
As a result, most news outlets tend to limit themselves to showing the last few sets of the semi-finals and the final in which the archers seem to effortlessly hit the bullseye every time. As a matter of fact, it looks so easy that some observers argue that the target should be moved further out or be reduced in size. Others would like to see some of the performance- enhancing pieces of equipment banned to improve the difficulty level. That is what brings me to the survivorship bias.
Survivorship bias is a cognitive shortcut that occurs when a successful subgroup is mistaken as the entire group, due to the invisibility of the failure subgroup. Think of it as evidence that is not available for examination. The name comes from the error an individual makes when a data set only considers the “surviving” observations, excluding points that didn’t survive[2]. It is rampant in the investment field. It occurs, for instance, when a fund strategy manager or sponsor boasts an impressive track record for a particular strategy over a short period of time but who is silent about his or her sponsorship of strategies that are failing of that have failed. Subtracting poorly performing or failed strategies from existence may lead to an optimistic assessment of the future prospects for a specific investment strategy manager or sponsor.
Investment is like a competitive sport. Strategies that succeed in delivering statistically significant outperformance over a representative benchmark over a very long period (more than 10 years) are typically those that have shown an ability to adjust or adapt to various market conditions. Success over short periods (less than 5 years) may have more to do with luck than skill. With that in mind, at Patrimonica, we encourage our clients to heavily discount strategies that do not have an audited, continuous track record of at least 10 years, with similar or higher assets under management over that same period. But even then, that does not guarantee superior results in the future. That said, our belief is that a strategy that has successfully navigated various environments in the past may be more likely to adapt to future changes in the environment than brand new ones. In other words, we think it is less likely to be worse in the future if it has been repeatedly tested in the past.
Getting back to the Olympic archery competition, if you are under the impression that it looks too easy after you watched the final, you are a victim of survivorship bias because your conclusion excludes, from the analysis, all the other contestants that have failed to make it to the final and that you have not seen. As such, my personal view is that the competition does not need to be made more difficult. The finalists already showed that they were not bothered by excessive heat, mosquitos, wind gusts, strained deltoids, or something else.
Dimitri Douaire, M. Sc., CFA
Chief Investment Officer
[1] The modern recurve bow competition at the Olympic Games has archers shooting at a 122 centimetres target that is 70 metres away. The bullseye is approximately the size of an apple.
[2] Survivorship Bias - Overview, Impact, and How to Prevent. (2020, May 15). Retrieved from https://corporatefinanceinstitute.com/resources/knowledge/other/survivorship-bias/