The impact of skew on performance and bias

In this paper, we explore the relationship between the statistic skew and known behavioral biases. We investigate the impact that skew has on the perception of performance as a function of time, and we show that negative skew artificially improves performance over the short term, while positive skew...

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Bibliographic Details
Published in:Journal of behavioral and experimental finance 2019-06, Vol.22, p.232-238
Main Authors: Dugan, Zachary, Greyserman, Alexander
Format: Article
Language:English
Subjects:
Behavioral biases
Drawdown
Loss aversion
Recency bias
Skew
Volatility
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Summary:In this paper, we explore the relationship between the statistic skew and known behavioral biases. We investigate the impact that skew has on the perception of performance as a function of time, and we show that negative skew artificially improves performance over the short term, while positive skew has the opposite effect. We quantify the relationship between skew and drawdown depth and length, and we show that negative skew increases drawdown depth and length, and that again positive skew does the opposite. Finally, we explore the relationship between skew, volatility, and drawdown, and we show that negative skew amplifies the increase that volatility causes in drawdown depth and length, while positive skew has a corresponding dampening effect.
ISSN:2214-6350
2214-6350
DOI:10.1016/j.jbef.2019.03.008