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"Optimizer's Curse"

Link to a brief handout:  optcurse.pdf

What it's about: The mere process of screening our investments can introduce a bias, even if the investment evaluations are carefully and objectively prepared. On average, the investment evaluations may be objective, i.e., unbiased. However, a selected investment is more likely to be one where we are randomly optimistic.

The optimizer's curse is analogous to:

• The winner's curse. The winner of a competitive bidding process is likely to be the company most optimistic about this particular asset.
• Survivorship bias: Mutual funds in which you might invest almost always have great track records. Those funds that do not have been disbanded or rolled in other funds.

—John Schuyler, May. 2006.

Copyright © 2006 by John R. Schuyler. All rights reserved. Permission to copy with reproduction of this notice.