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The J-Shape of Performance Persistence Given Survivorship Bias
Darryll Hendricks, Jayendu Patel and Richard Zeckhauser
The Review of Economics and Statistics
Vol. 79, No. 2 (May, 1997), pp. 161-166
Published by: The MIT Press
Stable URL: http://www.jstor.org/stable/2951447
Page Count: 6
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Performance may enhance survival probability. When it does, the induced lack of randomness challenges robust and unbiased inference. If survivors are sorted into two groups based on past performance, spurious persistence has been demonstrated if variance in performance is heterogeneous. However, as we show both theoretically and with simulations, if performance is categorized finely, the spurious persistence will be J-shaped; that is, at the bottom better performance in one period "predicts" worse performance for another period. We propose a simple t-test applied to the quadratic coefficient in a regression to distinguish between a spurious J-shape and monotonic patterns. Mutual funds, our example, exhibit the monotonically increasing pattern produced by true performance persistence.
The Review of Economics and Statistics © 1997 The MIT Press