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The winner’s curse refers to a scenario where the bidder who wins an auction pays more than the asset's true value.
This can happen due to subjective factors such as incomplete information, emotions, rumours, and other behavioural biases.
For instance, a person buys a house at an auction, only to realise that they overpaid for it potentially due to poor market research or overestimating its value.
Imagine an auction with 30 people for a jar filled with ₹1, ₹2 and ₹5 coins. In the end, Mr. S places the winning bid of ₹150 for the jar.
After completing the transaction, he finds out that the jar has coins worth ₹100. Thus, Mr. S ended up overpaying by ₹50.
Even though Mr. S realises he overpaid, he cannot do anything since he has already paid. This is the essence of the winner’s curse.
Auctions are common, from mergers and acquisitions to real estate. Being aware of the winner’s curse helps to be more mindful in these situations.
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