The Winner's Curse

What it is

Three Atlantic Richfield engineers, E. C. Capen, R. V. Clapp and W. M. Campbell, described it in the Journal of Petroleum Technology in 1971, observing that, setting aside the era before 1950, "the Gulf has paid off at something less than the local credit union." Richard Thaler's 1988 "Anomalies" column credited them with its first discussion and reported the 1969 Alaska North Slope sale, where winning bids totalled $900 million against $370 million for the second-highest offers.

In 1983 Max Bazerman and William Samuelson auctioned jars worth $8 to 419 MBA students at Boston University. The average estimate was $5.13 and the average winning bid $10.01. John Kagel and Dan Levin found in 1986 that groups of six or seven bidders lost money where theory predicted a profit, because they bid more aggressively as the crowd grew instead of more cautiously.

Later work added emotion and attention. Gillian Ku, Deepak Malhotra and J. Keith Murnighan proposed in 2005 that rivalry, time pressure and an audience raise arousal and bids, drawing on Chicago's 1999 Cows on Parade charity sales, where prices ran to roughly seven times estimates. Ulrike Malmendier and Young Han Lee found in 2011 that 42 per cent of eBay auctions of one board game closed above a fixed price on the same page, which they attributed to limited attention. Henry Schneider argued in 2016 that once search costs are counted, the overbidding is consistent with standard behaviour.

In effect

Before bidding, ask whether the prize is worth much the same to everyone and whether its value is uncertain, how many people are bidding, and whether the same thing is on sale at a fixed price nearby. Write your limit down before the bidding starts. Richard Shotton's The Choice Factory (Bias 19, pages 131 to 136) applies the idea to programmatic advertising and suggests bidding where others are not and shaving bids by around a tenth.

What it does not say

Most of the clean evidence comes from laboratories with small stakes. Thaler cautioned that the Alaska figures were consistent with the curse without proving irrationality, and Douglas Dyer and Kagel found in 1996 that experienced construction executives suffered the curse in the laboratory while industry practices protected them in their trade. The eBay evidence is contested. Because the right discount grows with the number of rivals, a fixed tenth may be too much in a thin market and too little in a crowded one, and whether digital media is systematically overpriced is not tested in Shotton's chapter.

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