Winner’s Curse

The winner’s curse is the unfortunate consequence of an auction in which the winning offer for an item is bid so much higher than the item’s worth that the winner cannot recover enough value to justify the price paid. The winner’s curse phenomenon has been confirmed in numerous empirical studies by economists, operations researchers, sociologists, and others.

A free market can function like an auction. Sellers offer their goods, and buyers bid the prices they are willing to pay for those goods. Bidders, though they might be sensitive to price and prefer to pay the lowest amount possible, “win” the auction when a seller accepts theirs as the highest price offered. In a free market for scarce goods, as in an auction, buyers tend to willingly ...