The Signal and the Noise: Why So Many Predictions Fail-but Some Don't

by Nate Silver

A common experiment in economics classrooms, usually employed when the professor needs some extra lunch money, is to hold an auction wherein students submit bids on the number of pennies in a jar.77 The student with the highest bid pays the professor and wins the pennies (or an equivalent amount in paper money if he doesn’t like loose change). Almost invariably, the winning student will find that he has paid too much. Although some of the students’ bids are too low and some are about right, it’s the student who most overestimates the value of the coins in the jar who is obligated to pay for them; the worst forecaster takes the “prize.” This is known as the “winner’s curse.”