Winner’s Curse

Akhtar Shahi QureshiAnurag AroraDivyaNishant Goyal

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He is the richest who is content with the least, for content is the wealth of

nature.~Socrates

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WINNERS’CURSE

How?

How can a win possibly be a curse?

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A tendency for the winning bid in an auction to exceed the intrinsic value of the

item purchased.

Because of incomplete information, emotions or any other number of factors

regarding the item being auctioned, bidders can have a difficult time

determining the item's intrinsic value.

As a result, the largest overestimation of an item's value ends up winning the

auction.

Conditions generally ending in Winner’s Curse:

Common value auctionsIncomplete information

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Popular Example

US federal government conducted an auction of potentially valuable oil leases in

the Gulf of Mexico.

Companies had no experience bidding on such leases, but they did have access to

standard geological methods for estimating their value. In hindsight, we see that the oil leases fetched prices that were too high.

In fact, the returns from a savings account would have been much higher than the winning bidders, who paid millions of

dollars for their leases.

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Decision Making in spectrum allocation policy

Between 2004 and 2009 when the spectrum allocations were through a fixed-price policy.

Then, 2G scam happened.

3G spectrum allocation was, hence, through Auctions.

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Indian Telecom Since 2010…3G spectrum Auction in 2010:

In 3G auctions, the operators suffering from Winner’s Curse overbid the actual price of

spectrum and now reviving their costs from market.

For the first time in the country’s 17-year mobile telecom history, call rates have increased.

The mobile voice bill for an average consumer is set to rise by 20 per cent and data charges by 20 times!

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Between 2004 and 2009 when the spectrum allocations were through a

fixed-price policy, receiving calls became free and charges dropped a

further 90 per cent, leading to another 600 million people becoming

mobile-enabled.

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Winner’s curse does NOT affect every auction. BATMAN’s collector item on E-bay will be

worth 10$ to one person and 100$ to another. Actual value might be pretty lower.

Due to pseudo endowment effect, private value is attached to it. And hence, it is not the example of common value auction.

If buyer’s estimate of an asset’s value is affected only by his own

perceptions and NOT by perception of others, he would be willing to pay up to his valuation.

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In case of IPOs

Investors have different information about the fair value of the shares.Uninformed investors subscribe to every IPO, informed investors only buy new shares if the issue price if less than the fair value. This causes a Winner’s curse for the uninformed investors.

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Bid Strategy as devised by Capen, Clapp and Campbell in their research

Evidence was found by CCC that one should bid lower in auctions to avoid loosing too much money. Three basic guidelines are given for a better bid strategy:

1. The less information one has compared with what the opponents have, the lower one should bid.

2. The more uncertain one is about the value estimate, the lower one should bid.

3. The more bidders (above three) that show up on a given parcel, the lower one should bid.

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ConclusionBehavioral analysis wrt Winner’s Curse

It is true that one should be aware of this fact when entering a bidding situation.

But it is probably also true that some of your fellow bidders will not know of this phenomenon. What

should you do? Lowering your bid is what seems reasonable, but…if you are the only one doing so, then chances of

having a winning bid will be next to nil. You might even consider not bidding at all, but this

is not satisfactory unless you want to quit your business.

What you can do is share your knowledge. The more informed players in a bidding game there are, the

less is the effect of the Winner's Curse. If you can convince the other players to lower their

bids as well, then the bidding game will be profitable again.

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So What’s the bottom line ???

If you want to be an entrepreneur who wants to be successful at trying to bid on projects large and small, try

to keep the winner’s curse in your head and the number of people in the room while deciding your next

bid. With experience and a sight for the winner’s curse, you’ll become a

great bidder.

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Thank You Queries please?