Winner’s curse
DESCRIPTION
The tendency for the highest bid at an auction to exceed the true market value of the item or lot being auctioned.
The tendency for the highest bid at an auction to exceed the true market value of the item or lot being auctioned.
KEY INSIGHTS
Originally discussed by Capen, Clapp, and Campbell (1971) and subsequently developed in research by Thaler (1992), the winner’s curse phenomenon arises when bidders’ estimates of the true market value of an auctioned item (or lot) are unreliable as a result of incomplete information and when each bidder independently estimates the value of the item before bidding. In such circumstances, some bidders will underestimate the item’s value while others will overestimate its value. While the average bid for an auctioned item is often less than its true market value, reflecting risk averseness among bidders, the bidder overestimating the item’s true market value to the greatest extent among all bidders becomes the victim of the winner’s curse. In general, the severity of the winner’s curse increases as the number of bidders at an auction increases. When an auctioned item is sought for its private value, however, as when a bidder desires an object of art to complete his or her art collection, the winner’s curse is not said to apply as private valuation is more important to the bidder than market valuation. Bidders seeking to avoid the winner’s curse tend to make efforts to revise downward their ex ante estimations of an item’s value to explicitly take into account the effect of the winner’s curse.
Originally discussed by Capen, Clapp, and Campbell (1971) and subsequently developed in research by Thaler (1992), the winner’s curse phenomenon arises when bidders’ estimates of the true market value of an auctioned item (or lot) are unreliable as a result of incomplete information and when each bidder independently estimates the value of the item before bidding. In such circumstances, some bidders will underestimate the item’s value while others will overestimate its value. While the average bid for an auctioned item is often less than its true market value, reflecting risk averseness among bidders, the bidder overestimating the item’s true market value to the greatest extent among all bidders becomes the victim of the winner’s curse. In general, the severity of the winner’s curse increases as the number of bidders at an auction increases. When an auctioned item is sought for its private value, however, as when a bidder desires an object of art to complete his or her art collection, the winner’s curse is not said to apply as private valuation is more important to the bidder than market valuation. Bidders seeking to avoid the winner’s curse tend to make efforts to revise downward their ex ante estimations of an item’s value to explicitly take into account the effect of the winner’s curse.
KEYWORDS Auctions, valuation, bidding
IMPLICATIONS
Marketers involved in auction bidding should seek to understand the extent the winner’s curse phenomenon may occur as a result of incomplete information concerning an item’s value and knowledge of the number of an auction’s participants. Marketers may then more judiciously make efforts to avoid the winner’s curse by revising their ex ante value estimates downward as one possible practice. On the other hand, marketers running auctions should seek to understand the extent that a consumer participating in an auction may become a victim of the winner’s curse and, while contributing positively to auction profitability, how such an outcome may influence the consumers’ subsequent auction participation and bidding behaviors.
Marketers involved in auction bidding should seek to understand the extent the winner’s curse phenomenon may occur as a result of incomplete information concerning an item’s value and knowledge of the number of an auction’s participants. Marketers may then more judiciously make efforts to avoid the winner’s curse by revising their ex ante value estimates downward as one possible practice. On the other hand, marketers running auctions should seek to understand the extent that a consumer participating in an auction may become a victim of the winner’s curse and, while contributing positively to auction profitability, how such an outcome may influence the consumers’ subsequent auction participation and bidding behaviors.
APPLICATION AREAS AND FURTHER READINGS
Auctions
Samuelson, W., and Bazerman, Max H. (1985). ‘Negotiation under the Winner’s Curse,’ in V. Smith (ed.), Research in Experimental Economics, vol. iii. Greenwich, Conn.: JAI Press.
Samuelson, W., and Bazerman, Max H. (1985). ‘Negotiation under the Winner’s Curse,’ in V. Smith (ed.), Research in Experimental Economics, vol. iii. Greenwich, Conn.: JAI Press.
Ferris, Kenneth R., and Pécherot Petitt, Barbara S. (2002). Valuation: Avoiding the Winners Curse. Upper Saddle River, NJ: Prentice-Hall, Inc.
Chua, Clare, and Luk, Peter (2005). ‘Be a Winner Not a Loser: Experimental Evidence of Winner’s Curse,’ Marketing Review, 5(4), Winter, 303–314.
BIBLIOGRAPHY
Capen, E. C., Clapp, R. V., and Campbell, W. M. (1971). ‘Competitive Bidding in High-Risk Situations,’ Journal of Petroleum Technology, June, 641–653.
Capen, E. C., Clapp, R. V., and Campbell, W. M. (1971). ‘Competitive Bidding in High-Risk Situations,’ Journal of Petroleum Technology, June, 641–653.
Thaler, Richard (1988). ‘Anomalies: The Winner’s Curse,’ Journal of Economic Perspectives, 2(1), 191–202.
Thaler, Richard (1992). The Winner’s Curse. New York: The Free Press.
wireless marketing see mobile marketing
word-of-mouse marketing see viral marketing
word-of-mouse marketing see viral marketing