Winner's curse
Winning a contest for something of uncertain value means you were the most optimistic bidder, which is itself evidence that you bid too much.
Often misread asShading the bid for ordinary caution while still valuing the item at your own unconditional estimate, so winning is treated as a pleasant surprise instead of as evidence.
How to see it
Winning is bad news about your own estimate
When several bidders estimate the same unknown value and the highest bid wins, the winner is whoever was the most optimistic, which usually means whoever overestimated by the most. Your estimate may have been unbiased before the auction, but conditional on having won it was too high. The remedy is to bid as though you already knew you had won.
The checkAsk what the item is worth given that every other bidder valued it below your bid, and bid against that number rather than against your raw estimate.
Try itTen people guess the number of coins in a jar, each unbiased on average, and the highest guess buys the jar at their guess. The average of the ten guesses is roughly right. Now ask how the highest of ten guesses compares with the truth, and whether you would want to be that person.
Games that show it
Know these first
Leads on to
Easily confused with
Sources
- Capen, E. C., Clapp, R. V. & Campbell, W. M. (1971). Journal of Petroleum Technology 23(6), 641-653. The original winner's curse observation, from oil lease auctions.
- Thaler, R. (1988). Journal of Economic Perspectives 2(1), 191-202.
- Krishna, V. (2002). Academic Press.