Wednesday, July 8, 2009

Cause of the Winner’s Curse at Auctions

It is well known that the winner of an auction tends to be the person who most overestimates the value of the item being auctioned. The loss resulting from overpaying has been dubbed the “winner’s curse.”

In a study of the winner’s curse (full text here), researchers conducted experiments to see if poor value estimation skills were really the main cause of overpaying at auctions.

These experiments involved having people participate in auctions under different conditions. The main difference was that some auctions were conducted with several people, and others had people compete against a computer algorithm (and they knew that is was a computer).

The results showed that when people outbid a computer algorithm, their bids tended to remain at rational levels. However, when people compete against other people in an auction, the winning bid tends to be significantly higher.

This suggests that people tend to become competitive and willing to overpay just so that they won’t “lose” to another human bidder. Of course, the real loser is usually the person with the highest bid.

So, if you’re thinking of bidding on real estate or cars or other high priced items, you should consider keeping your competitive instincts in check and gracefully conceding to another bidder who goes above the maximum price you decided on in advance.

1 comment:

  1. A man's got to know his limitations. - Harry Callahan