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Encyclopedia > Winner's curse

The winner's curse is a phenomenon akin to a Pyrrhic victory that occurs in common value auctions with incomplete information. In short, the winner's curse says that in such an auction, the winner will tend to overpay. However, an actual overpayment will generally occur only if a bidder fails to account for the winner's curse when bidding. So despite its dire-sounding name, the winner's curse does not necessarily have ill effects. A Pyrrhic victory is a victory with devastating cost to the victor. ... A common value auction is a term in economics describing an auction in which the good being auctioned is valued the same by each participant. ... This article or section does not adequately cite its references or sources. ... Complete information is a term used in economics and game theory to describe a economic situation or game in which knowledge about other market participants or players is available to all participants and is instantaneously updated as new information arises. ...

## Contents

In a common value auction, the auctioned item is of roughly equal value to all bidders, but the bidders don't know the item's market value when they bid. Each player independently estimates the value of the item before bidding.

The winner of an auction is, of course, the bidder who submits the highest bid. Since the auctioned item is worth roughly the same to all bidders, they are distinguished only by their respective estimates. The winner, then, is the bidder making the highest estimate. If we assume that the average bid is accurate, then the highest bidder overestimates the item's value. Thus, the auction's winner is likely to overpay. In mathematics, an average or central tendency of a set (list) of data refers to a measure of the middle of the data set. ...

More formally, this result is obtained using conditional probability. We are interested in a bidder's expected value from the auction (the expected value of the item, less the expected price) conditioned on the assumption that the bidder wins the auction. It turns out that for a bidder's true estimate the expected value is negative, meaning that on average the winning bidder is overpaying. This article defines some terms which characterize probability distributions of two or more variables. ... In probability theory the expected value (or mathematical expectation) of a random variable is the sum of the probability of each possible outcome of the experiment multiplied by its payoff (value). Thus, it represents the average amount one expects as the outcome of the random trial when identical odds are...

Savvy bidders will avoid the winner's curse by bid shading, or placing a bid that is below their ex ante estimation of the value of the item for sale - but equal to their ex post belief about the value of the item, given that they win the auction. The key point is that winning the auction is bad news about the value of the item for the winner. It means that he/she was the most optimistic and if bidders are correct in their estimations on average, that too much was paid. Therefore savvy bidders revise their ex ante estimations downwards to take account of this effect. In an auction, bid shading describes the practice of a bidder placing a bid that is below what they believe a good is worth. ... Ex ante is a Latin term meaning beforehand. Ex ante evaluations deal with forecasting and forecasted returns on invested money. ... Ex ante is a Latin term meaning beforehand. Ex ante evaluations deal with forecasting and forecasted returns on invested money. ...

The severity of the winner's curse increases with the number of bidders. This is because the more bidders, the more likely it is that some of them have overestimated the auctioned item's value. In technical terms, the winner's expected estimate is the value of the first order statistic, which increases as the number of bidders increases. In statistics, the kth order statistic of a statistical sample is equal its kth-smallest value. ...

There is often confusion that winner's curse applies to the winners of all auctions. However, it is worth repeating here that for auctions with private value (i.e. when the item is desired independent of its value in the market), winner's curse does not arise.%%

## Examples

Since most auctions involve at least some amount of common value, and some degree of uncertainty about that common value, the winner's curse is an important phenomenon.

In the 1950s, when the term winner's curse was first coined, there was no accurate method to estimate the potential value of an offshore oil field. So if, for example, an oil field had an actual intrinsic value of \$10 million, oil companies might guess its value to be anywhere from \$5 million to \$20 million. The company who wrongly estimated at \$20 million and placed a bid at that level would win the auction, and later find that it was not worth as much. Drilling rig in a small oil field Near Sarnia, Ontario, 2001 An oil field is an area with an abundance of oil wells extracting petroleum (oil) from below ground. ...

Other auctions where the winner's curse is significant:

A Spectrum auction is a process whereby governments use an auction system to sell the rights to broadcast over specific electromagnetic wavelengths. ... Legend: Î³ = Gamma rays HX = Hard X-rays SX = Soft X-Rays EUV = Extreme ultraviolet NUV = Near ultraviolet Visible light NIR = Near infrared MIR = Moderate infrared FIR = Far infrared Radio waves: EHF = Extremely high frequency (Microwaves) SHF = Super high frequency (Microwaves) UHF = Ultra high frequency VHF = Very high frequency HF = High... Nickname: Big Apple, Gotham, NYC, City That Never Sleeps, The Concrete Jungle, The City So Nice They Named It Twice Location in the state of New York Coordinates: Country United States State New York Boroughs The Bronx Brooklyn Manhattan Queens Staten Island Settled 1676  - Mayor Michael Bloomberg (R) Area    - City... An initial public offering (IPO) is the first sale of a corporations common shares to public investors. ... Market capitalization, often abbreviated to market cap, mkt. ... It has been suggested that shareholder be merged into this article or section. ...

In game theory the War of attrition is a model of aggression in which two contestants compete for a resource of value V by persisting while accumulating costs at a constant rate c. ... A heroic failure is a loss or losing draw, in which the losing side has actually gained the moral upper hand. ... In general use, a no-win situation is one where a person has choices, but no choice leads to success. ... This page is a candidate to be moved to Wiktionary. ... In the film Reservoir Dogs, Eddie, Joe, and Mr. ... A Pyrrhic victory is a victory with devastating cost to the victor. ...

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