Cherry picking

What Is Cherry Picking?

Cherry picking, in the context of finance, refers to the selective presentation of information or data to support a particular conclusion while ignoring evidence that contradicts it. This practice falls under the broader umbrella of Financial Analysis and often involves elements of cognitive biases. While it can sometimes be an unintentional omission, cherry picking is frequently a deliberate act to create a misleadingly favorable impression of performance or prospects. This can manifest in various areas, from showcasing only profitable securities within a portfolio management strategy to highlighting specific data points in economic reports.³⁴, ³⁵

History and Origin

The term "cherry picking" is an idiom derived from the literal act of harvesting fruit, where a picker would ideally select only the ripest and healthiest cherries from a tree. An observer, seeing only this selection, might mistakenly believe that all the fruit on the tree is of similar quality. This analogy highlights the core deceptive nature of the practice: presenting a partial, skewed view as if it represents the whole. As a logical fallacy, cherry picking has been recognized for centuries as a method of argumentation that suppresses evidence, thereby leading to distorted conclusions. This practice can be intentional or unintentional, but its impact remains the same: it prevents a comprehensive understanding of the full picture.³³

Key Takeaways

• Cherry picking is the selective presentation of data or information that supports a desired conclusion while omitting contradictory evidence.
• In finance, it can involve misrepresenting investment performance or selectively highlighting positive aspects of a financial situation.
• The practice can be an intentional act of deception or an unintentional outcome of confirmation bias.
• It undermines objective data analysis and can lead to flawed decision-making for investors and other stakeholders.
• Fraudulent cherry picking in finance is illegal and strictly prohibited by regulatory bodies.

Interpreting the Cherry Picking

When encountering information where cherry picking might be at play, a critical approach is necessary. In financial reporting, for example, an analyst or firm might present only the periods of strong returns while omitting periods of poor performance, thereby distorting the actual overall track record. Similarly, in marketing materials for an investment strategy, a company might focus solely on a few successful investments without providing context about the total number of investments made or the outcomes of less successful ones. Recognizing cherry picking requires looking beyond the presented narrative and seeking a more complete set of data, including information that may challenge the presented viewpoint. This comprehensive approach is vital for sound investment analysis.³⁰, ³¹, ³²

Hypothetical Example

Consider a hypothetical scenario involving an investment manager, "Alpha Capital." Alpha Capital is pitching its new technology fund to potential investors. The manager presents a slide deck highlighting the fund's top three performing securities over the past year, showing impressive gains of 40%, 35%, and 30% respectively. This, they argue, demonstrates the strength of their portfolio management capabilities.

However, a closer look at the fund's actual holdings, which are not prominently displayed, reveals that these three companies represent only a small fraction of the fund's total positions. The remaining 97% of the portfolio includes numerous underperforming assets, with several experiencing significant losses, resulting in the fund's overall net return for the year being a modest 5%. By selectively showcasing only the "best cherries"—the top three winners—Alpha Capital engages in cherry picking to create a more attractive, yet incomplete, picture of its performance. This selective disclosure allows them to imply superior results without explicitly lying about the highlighted individual gains.

##²⁸, ²⁹ Practical Applications

Cherry picking appears in various facets of the financial world. It is frequently observed in:

• Investment Performance Reporting: Investment firms or individual advisors might selectively present past returns, showcasing only periods of high gains while omitting or downplaying periods of losses. This can create a misleading impression of consistent success to attract new clients.
• ²⁶, ²⁷ Marketing and Sales Pitches: Financial products, such as mutual funds or Exchange-Traded Funds (ETFs), may be marketed by highlighting their top-performing holdings or best-performing historical periods, without providing a balanced view of overall fund performance or typical risk management considerations.
• ²⁵ Regulatory Scrutiny: In more egregious cases, cherry picking can become a fraudulent practice where investment managers allocate profitable trades to personal accounts or favored clients, while assigning losing trades to other client accounts. This violates an advisor's fiduciary duty and is strictly prohibited by regulatory bodies like the Securities and Exchange Commission (SEC). The SEC has pursued enforcement actions against individuals and firms engaging in such schemes. For²², ²³, ²⁴ example, the SEC charged a former investment adviser in 2018 for a cherry-picking scheme involving misallocating profitable trades. [https://www.sec.gov/news/press-release/2018-204]
• Bankruptcy Proceedings: In the context of bankruptcy law, cherry picking refers to the ability of a debtor or trustee to assume favorable contracts and leases while rejecting unfavorable ones. This allows the bankrupt entity to retain beneficial agreements necessary for reorganization while shedding burdensome obligations.

##²¹ Limitations and Criticisms

The primary limitation of cherry picking is that it provides an incomplete and often distorted view of reality. By focusing only on data that supports a particular narrative, it inevitably omits crucial contradictory information, leading to flawed conclusions and misguided decisions.

Fo¹⁷, ¹⁸, ¹⁹, ²⁰r investors, relying on cherry-picked information can lead to poor diversification and an inflated sense of potential returns, underestimating true risks. For financial professionals, engaging in cherry picking undermines trust and credibility, and in its fraudulent forms, carries severe legal and ethical consequences. It is considered a hallmark of "poor science or pseudo-science" because it lacks objectivity and transparency. As ¹⁵, ¹⁶a result, critical assessments of investment performance, academic research, or any financial reporting must actively guard against this practice to ensure accuracy and foster informed decision-making. [Research Affiliates, "The Dangers of Cherry-Picking"] The selective use of data, even if unintentional, can severely compromise the integrity of data analysis and lead to erroneous conclusions. Res¹³, ¹⁴earchers emphasize that transparency in data collection and analysis is crucial to mitigate its impact.

##¹² Cherry Picking vs. Survivorship Bias

Cherry picking and survivorship bias are related but distinct concepts, both of which can lead to misleading conclusions due to selective data.

Cherry picking involves the deliberate selection of data points or individual cases that support a particular position, while actively ignoring or suppressing contradictory evidence. It is a conscious act of manipulation or a result of strong confirmation bias, where an individual actively seeks out confirming evidence and dismisses disconfirming evidence.

¹¹Survivorship bias, on the other hand, is the logical error of focusing only on "surviving" data points, processes, or entities, while overlooking those that failed or were eliminated. This often happens because the "failures" are no longer visible. For example, studying only successful companies to understand business strategies, while ignoring the vast number of companies that failed, is an example of survivorship bias. It's not necessarily a deliberate act of suppression but rather an inherent bias in the available data.

Th⁹, ¹⁰e key difference lies in the intentionality: cherry picking is typically an active, conscious choice to present a skewed view, whereas survivorship bias is more often a passive oversight resulting from the unavailability of failed outcomes.

##⁸ FAQs

Is cherry picking always illegal in finance?

Not always. While fraudulent cherry picking, particularly when investment managers unfairly allocate trades to benefit themselves, is illegal and subject to strict penalties from regulators like the Securities and Exchange Commission (SEC), other forms may be unethical but not necessarily illegal. For instance, selectively highlighting positive aspects in marketing materials without explicitly lying about overall performance might be considered misleading but could fall into a grey area depending on disclosure rules.

##⁵, ⁶, ⁷# How does cherry picking affect individual investors?

Individual investors can be significantly affected by cherry picking if they rely on incomplete or biased information to make decisions. If an investor is presented with cherry-picked performance data for a mutual fund or an Exchange-Traded Fund (ETF), they might mistakenly believe the investment is less risky or more profitable than it actually is. This can lead to poor asset allocation, inadequate diversification, and ultimately, financial losses.

##³, ⁴# Can cherry picking be unintentional?

Yes, cherry picking can occur unintentionally. It can stem from cognitive biases, such as confirmation bias, where individuals unconsciously seek out and interpret information in a way that confirms their existing beliefs or hypotheses, while overlooking contradictory evidence. Even without malicious intent, this can still lead to an incomplete or distorted understanding of the data.¹, ²