Glossary

Look-ahead bias

Using information in a test that was not yet available on the date of the decision.

Companies report their results weeks after a quarter ends, and they sometimes restate them later. A backtest that uses a quarter's numbers on the day the quarter ended, or uses corrected figures that only appeared years later, knows things no investor knew at the time.

The fix is point-in-time data: each figure as first reported, used only from the date it became public.

Look-ahead bias makes a rule look better than it could ever have done in practice.

  • Backtest: A test of an investment rule on past data, to see how it would have done.
  • Survivorship bias: The error of studying only the companies that still exist, which leaves out the ones that failed.

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