Elite Warrior

Posts Tagged ‘curse

The Winner’s Curse

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This phenomenon is known as Winner’s Curse. Let us take an example and then we will talk on it.

A teacher comes in a room with coin filled in a glass jar.The  teacher gives option to the student to guess for the total amount of money, the guy guessing largest amount of money will be getting the jar for that price. Almost more than 60% of the student will be bidding for nearest value of the sum in jar adhering to wisdom of crowd and some will bid for quite lesser than the actual sum and some will go for more than the actual sum. The guy winning the bid has paid more than the item auctioned values. The winner always gets the feeling that he overpaid.

First of all, let’s see what common value auction means. Common value auction is the type of auction where the item has got a fixed value for all participant for example a 8-GB USB drive. Its market value is fixed and costs equal for all. So, when in auction most of the people will be bidding near the market value but the guy winning the bid must be bidding higher than other fellows i.e. higher than its market price. So, after getting the product he gets a felling that he could have bought it in lesser price in market.So, it becomes a losing situation.

If the auction is not common value auction then there is different situation. Lets take example for bidding of bat-mask and bat-belt. I am a bat man fan so I could want to buy it for $150 but for one of my friend who doesn’t like batman at all it could have a value of less than $10. So , in this case, the winner is not necessarily loser. One of the way to avoid winner’s curse is to bid closets to market price.

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Written by elitewarrior

March 15, 2009 at 11:12 pm

Posted in The Almighty Buck

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