[Note: This comment seems pretty pedantic in retrospect. Posting anyway to gauge reception, and because I’d still prefer clarity.]
On honest businesses, I’d expect successful ones to involve overconfidence on average because of winner’s curse.
I’m having trouble understanding this application of winner’s curse.
Are you saying something like the following:
People put in more resources and generally try harder when they estimate a higher chance of success. (Analogous to people bidding more in an auction when they estimate a higher value.)
These actions increase the chance of success, so overconfident people are overrepresented among successes.
This overrepresentation holds even if the “true chance of success” is the main factor. Overconfidence of founders just needs to shift the distribution of successes a bit, for “successful ones to involve overconfidence on average”.
First, this seems weird to me because I got the impression that you were arguing against overconfidence being useful.
Second, are you implying that successful businesses have on average “overpaid” for their successes in effort/resources? That is central to my understanding of winner’s curse, but maybe not yours.
You get winner’s curse even if results are totally random. If you have an unbiased estimator with a random error term, and select only the highest estimate in your sample, the expected error is positive (i.e. you probably overestimated it).
[Note: This comment seems pretty pedantic in retrospect. Posting anyway to gauge reception, and because I’d still prefer clarity.]
I’m having trouble understanding this application of winner’s curse.
Are you saying something like the following:
People put in more resources and generally try harder when they estimate a higher chance of success. (Analogous to people bidding more in an auction when they estimate a higher value.)
These actions increase the chance of success, so overconfident people are overrepresented among successes.
This overrepresentation holds even if the “true chance of success” is the main factor. Overconfidence of founders just needs to shift the distribution of successes a bit, for “successful ones to involve overconfidence on average”.
First, this seems weird to me because I got the impression that you were arguing against overconfidence being useful.
Second, are you implying that successful businesses have on average “overpaid” for their successes in effort/resources? That is central to my understanding of winner’s curse, but maybe not yours.
Sorry if I’m totally missing your point.
You get winner’s curse even if results are totally random. If you have an unbiased estimator with a random error term, and select only the highest estimate in your sample, the expected error is positive (i.e. you probably overestimated it).