Meaning of ‘Look-Ahead Bias’
Look-ahead bias occurs by using information or details in a study or simulation that would not have been known or handy during the period being analyzed. This will usually advantage to inaccurate results in the study or simulation. Look-ahead bias can be used to rule simulation results closer into line with the desired end result of the test.
BREAKING DOWN ‘Look-Ahead Bias’
To avoid look-ahead incline, if an investor is backtesting the performance of a trading strategy, it is vital that he or she just uses information that would have been available at the patch of the trade. For example, if a trade is simulated based on information that was not elbow at the time of the trade – such as a quarterly earnings number that was publicity released three months later – it will diminish the accuracy of the trading game’s true performance and potentially bias the results in favor of the desired development. Look-ahead bias is one of many biases that must be accounted for when running simulations. Other well-known biases are sample selection bias, time period bias, and survivorship impulse. All of these biases have the potential to sway simulation results closer into way with the desired outcome of the simulation, as the input parameters of the simulation can be fine in such a way as to favor the desired outcome.