This question still comes up frequently in game development as various studios and groups start on new engines.
The short answer is that it depends on how complex your game entities will be. For simple entities, it doesn't really matter.
When you get into much more complicated entities, you have to rethink your approach. In general, you'll want to resist the urge to have the uber loop that iterates over every entity and calls some update/render/whatever function. That doesn't scale at all, unless every update, render, or whatever hierarchy is exactly the same. Which is fine for a game like Geometry Wars, but not for anything more complicated than that.
What you want to do is given the most general entity collection extract a usage specific traversal. For example, if you wanted to render the scene you should have a way of extracting all the renderable entities from the entity collection and then rendering all of them in some arbitrary batchable order. Same goes for physics, collision, AI, etc.
Some helpful links:
http://cowboyprogramming.com/2007/01/05/evolve-your-heirachy/
http://research.scee.net/files/presentations/gcapaustralia09/Pitfalls_of_Object_Oriented_Programming_GCAP_09.pdf
I highly recommend both; the first goes into design rationale for building game entities out of components, i.e., render component, physics component, AI component. The second goes into performance characteristics of various game entity approaches.