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.