The Winner’s Curse
Five deals. Four rival bidders. Winning is only half the job.
All figures are in millions of dollars. Every bidder sees a private estimate within $30M of the same true value. Highest bid wins and pays its bid; tied winners are drawn at random. Passing earns zero.
Your estimate is a clue, not a price guarantee.
Inside the deal
Leave room to be wrong
When everyone values the same target with noisy estimates, winning can mean you were the most optimistic. Shade your bid below your estimate to leave room for error; the right cushion depends on uncertainty and competition.
Read more: Game Theory Reading.
About: the winner’s curse was named in 1971 by Capen, Clapp and Campbell, engineers studying bids on offshore oil leases.