Survivorship Bias - in Business Law

In Business Law

Survivorship bias can raise truth-in-advertising problems when the success rate advertised for a product or service is measured with respect to a population whose makeup differs from that of the target audience whom the company offering that product or service targets with advertising claiming that success rate. These problems become especially significant when a) the advertisement either fails to disclose the existence of relevant differences between the two populations or describes them in insufficient detail; b) these differences result from the company's deliberate "pre-screening" of prospective customers to ensure that only customers with traits increasing their likelihood of success are allowed to purchase the product or service, especially when the company's selection procedures and/or evaluation standards are kept secret; and c) the company offering the product or service charges a fee, especially one that is non-refundable and/or not disclosed in the advertisement, for the privilege of attempting to become a customer.

• For example, the advertisements of online dating service eHarmony.com pass this test because they fail the first two prongs but not the third: They claim a success rate significantly higher than that of competing services while generally not disclosing that the rate is calculated with respect to a viewership subset who possess traits that increase their likelihood of finding and maintaining relationships and lack traits that pose obstacles to their doing so (a), and the company deliberately selects for these traits by administering a lengthy pre-screening process designed to reject prospective customers who lack the former traits and/or possess the latter ones (b), but the company does not charge a fee for administration of its pre-screening test, with the effect that its prospective customers face no "downside risk" other than losing the time and expending the effort involved in completing the pre-screening process (negating c).

(Similarly, many investors believe that chance is the main reason that most successful fund managers have the track records they do.)