What is a significant result of Survivorship Bias?

Survivorship bias occurs when only the data of entities that have survived or continued to exist is considered, while disregarding those that have failed or exited the market. This bias can lead to a distorted view of performance, as the results reflect only the successful entities, thereby painting an overly positive picture.

The choice of returns from funds still in operation is a significant result of survivorship bias because it inherently excludes the performance of terminated or underperforming funds. For instance, if a financial analyst evaluates the average performance of mutual funds but only includes those that are still active, they would miss out on the poorer returns of funds that no longer exist. This can misleadingly showcase the success of the funds that continue to operate, thus overestimating the general performance of all funds in that category.

In contrast, the other options do not directly align with the fundamental implications of survivorship bias. Underestimating fund performance is generally associated with excluding underperforming funds, while overestimating risk levels and enhancing understanding of market failures do not directly result from the survivorship bias phenomenon.