Winner's curse
The tendency for whatever was chosen because it measured best to disappoint afterwards, because the best measurement includes the most favourable luck.
In plain English
Every measurement is a true value plus noise. Pick the highest of several, and you pick one with lucky noise more often than not. When it's measured again, the luck is gone. The more options compared, the bigger the gap. The honest estimate comes from a fresh measurement made after the choice, or from shrinking the winner's figure towards the average of all options.
Uncle Gary explains
Out of ten ad versions, the winner measured a 6.8% lift on average in our simulation; its true lift was 3.2%, and a re-test on fresh traffic gave 3.3%.
Why it matters for your money
The best of 20 backtested trading rules is inflated in exactly this way. Test the winner on data that played no part in choosing it, and expect a smaller number.
Where we tested it
Related terms
All glossary terms. Educational content, not financial advice.