Readers who followed our tips beat the market

Question

A trading newsletter surveys its subscribers and reports that those who followed its trade recommendations beat the market last year, while those who ignored them did not. It uses this to prove the value of the service.

Identify the selection problems in this claim, and what a fair evaluation would require.

Accepted Answer

Followers select themselves. Subscribers who actually act on trade tips are not a random slice. They tend to have more capital, more experience, more time to trade, and more confidence, all of which affect returns independently of whether the tips are any good. Comparing followers to non-followers therefore compares two different kinds of investor, not the tips versus no tips. That is self-selection bias. Selection stacks up in several ways. There is more than one filter at work. Only certain people subscribe in the first place. Only certain subscribers respond to the survey, and people who d…

Readers who followed our tips beat the market

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