DEFINITION of 'Reverse Survivorship Bias'

Reverse survivorship bias describes a situation where tendency low performers remain in the game, while high performers are inadvertently dropped from the running. This is the opposite of survivorship bias, which occurs when only strong and successful members of a group survive and remain in the group. This often occurs when comparing performance of portfolio managers. Survivorship bias pushes returns higher because only the exceptional managers stay in business and are able to be measured. The bad managers cannot be measured because they no longer exist.

BREAKING DOWN 'Reverse Survivorship Bias'

Reverse survivorship bias can be applied to a variety of vehicles ranging from the housing market, stock indexes, and even investors' behaviors and capabilities. Whereas survivorship bias can bias returns or results of a group upward, reverse survivorship bias can have the opposite effect and push the overall return of the group downward. This is due to the best performers, who would've lifted overall results, being dropped from the group. The phenomenon occurs when calculating performance based solely on past performances, without taking into account extenuating circumstances such as the economic standpoint at which decisions were made.

An Example of Reverse Survivorship Bias

An example of reverse survivorship can be observed in the Russell 2000 index that is a subset of the 2000 smallest securities from the Russell 3000. The loser stocks stay small and stay in the small cap index while the winners leave the index once they become too big and successful.

RELATED TERMS
  1. Survivorship Bias Risk

    The possibility that an investor will make a misguided investment ...
  2. Russell 2500 Index

    The Russell 2500 Index is a broad index, featuring 2,500 stocks ...
  3. Russell 3000 Growth Index

    The Russell 3000 Growth Index is a market capitalization weighted ...
  4. Russell 1000 Index

    The Russell 1000 Index is an index of approximately 1,000 of ...
  5. Look-Ahead Bias

    Look-ahead bias occurs when information or data is used in a ...
  6. Russell 3000 Value Index

    Russell 3000 Value Index is a market-capitalization weighted ...
Related Articles
  1. Investing

    Mutual Fund Returns: Not Always What They Appear

    Survivorship bias erases substandard performers, distorting overall mutual fund returns.
  2. Investing

    Behavioral Bias: Cognitive Versus Emotional Bias in Investing

    We all have biases. The key to better investing is to identify those biases and create rules to minimize their effect on investing decisions.
  3. Financial Advisor

    8 Common Biases That Impact Investment Decisions

    Behavioral biases hit us all as investors and can vary depending upon our investor personality type.
  4. Insights

    Investment Fundamentals: S&P 500 Index Vs. Russell 1000 Index

    Learn about the similarities and differences between the S&P 500 and the Russell 1000 indices, and discover why investors may choose one over the other.
  5. Investing

    4 Investing Biases You Should Avoid

    Don't let these four behavioral biases interfere with your investment strategy and financial success.
  6. Financial Advisor

    Behavioral Finance: How Bias Can Hurt Investing

    Here are three cognitive biases from behavioral finance that investors would do well to be aware of to avoid making poor investment decisions.
  7. Small Business

    7 Ways Your Emotions Skew Your Business Decisions

    Important decisions such as making a key investment, increasing production or expanding into new lines are all clouded by human emotion. Can you stay cool under pressure?
  8. Investing

    Build A Model Portfolio With Style Investing

    This sophisticated approach will add flair to your returns.
  9. Investing

    Russell Rebalance Study: What You Need to Know

    Analyze the recent stock performance for different types of stocks to determine which equities could gain or benefit ahead of Russell index reconstitution.
RELATED FAQS
  1. What should I use as a benchmark for my small-cap stock portfolio?

    The Russell 2000 and S&P SmallCap 600 are two of the best indexes to use as a benchmark for small-cap performance. Read Answer >>
  2. What are some of the best small cap index funds?

    Learn about the best small-cap index funds, such as the iShares Russell 2000, IWM due to its low costs; liquidity; and diversification. Read Answer >>
  3. Is there such a thing as a nano cap or micro cap index?

    While there are indexes that track micro cap stocks, there are few indexes tracking nano caps. Although definitions vary, ... Read Answer >>
  4. How do indexes determine which stocks are removed or added to them?

    Stock indexes are formed based on the kinds of stocks or financial securities they want to track. For example, the Standard ... Read Answer >>
Hot Definitions
  1. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  2. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  3. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  4. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  5. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  6. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
Trading Center