What leads to the auction anomaly known as the "winner's curse," and how can bidders mitigate their risk?
What leads to the auction anomaly known as the "winner's curse," and how can bidders mitigate their risk?
Buyers and sellers commonly turn to auctions to optimally settle pricing, whether they're bidding on an eBay-listed tchotchke or Treasury bills. Nevertheless, auctions sometimes result in an anomaly known as the "winner's curse," in which an auction winner realizes after the fact that he or she has paid more than the object's value, especially in auctions where the object has a common value. Although the concept was introduced in 1971 to explain overbidding for oil- and gas-drilling rights, the anomaly has been documented as far back as the Roman Empire. In this case students examine auction formats, examples of the "winner's curse" and academic research to consider the causes of the anomaly and methods for mitigating the risk of getting hexed.
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