The Winner’s Curse

by | Jul 22, 2019

1959-ford-thunderbird-1-9056324
1959 Ford Thunderbird

The “winner’s curse” is an economic concept that refers to the fact that the winning bidder in a competitive auction often overpays. This phenomenon occurs even when the bidders have expertise with respect to the value of the item being auctioned.

For example, assume a 1959 Ford Thunderbird is auctioned off and there are 100 car enthusiasts at the auction. All the bidders know the general range of what such a car is worth, but 1959 Thunderbirds are relatively rare and each car has its own idiosyncrasies. The bidding begins at $25,000 and 10 people actively bid on the car. As the bids work their way to over $50,000 the number of active bidders drop to just two. The two bidders trade bids until finally the car sells for $59,000. Has the winning bidder overpaid?

Arguably, yes he has. The exact value for a relatively rare car is not knowable, but there were ten active bidders and nine of the ten decided that the car was not worth $59,000. Only the winning bidder thought it was worth that amount. If the “winner” tried to sell the car for $59,000 the next day among the 100 car enthusiasts who were at the auction he’d be unlikely to get such a price. Thus, the winning price at an auction often establishes the high end of the range of value.

The winner’s curse can occur anytime there is a competitive bidding process: artwork, “hot” houses on the market, classic cars, eBay auctions and IPOs structured as auctions.

0 Comments

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Subscribe To The IFOD

Get the Interesting Fact of the Day delivered twice a week. Plus, sign up today and get Chapter 2 of John's book The Uncertainty Solution to not only Think Better, but Live Better. Don't miss a single post!

You have Successfully Subscribed!

Share This