Suppose you have a jar of coins and ask several friends to bid on the jar. The highest bid will be deemed the winner. According to Richard H. Thaler ( “Anomalies: The Winner’s Curse published inThe Journal of Economic Perspectives ( Volume 2, Issue 1)(Winter 1988) at pp. 191-202), (Thaler ) two results will occur: “(1) the average bid will be significantly less than the value of the coins (bidders are risk adverse); (2) the winning bid will exceed the value of the jar”. This is known as the “winner’s curse”. (Id. at 192.)
The concept of the winner’s curse was first written about by three Atlantic Richfield engineers, Capen, Clapp and Campbell (1971) in connection with the purchase of oil drilling rights on particular parcels of land. The rights were auctioned off. Given the fact that it was difficult to estimate exactly how much oil was in a given location, the bids ranged from very high to very low. But, what often occurred is that the “winner” was most likely a “loser”. It was “cursed” in one of two ways: “(1) the winning bid exceed
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