Winner's curse

The winner's curse, and the curse of the highest bidder (English Winner 's curse ) is a model of behavioral economics and describes the effect that the highest bidder in auctions systematically pays too high a price in case of incomplete information. He meets with other pricing processes such as tenders. Within the framework of game theory methods are discussed to avoid this effect.

Model

The model is based on that individual market participants have different information, which cause them to assess the value of the auctioned item differently. Those who assess the value high, are subject to the risk to overestimate the true value, who consider him low to underestimate him. Winner of the auction is the highest bidder. In this, the risk is that he has overestimated the value, the highest.

Countermeasures

In order not to fall prey to the winner's curse, it makes sense not to offer the full estimated value, but subtract a safety margin. The height of this haircut is to make more sense as a function of the degree of uncertainty. Therefore, it makes sense from a seller point of view to produce the greatest possible transparency.

For example, the fee for foreclosures is usually below the appraised value. Since tenderers have not seen the object itself, they take just before a safety margin on the estimate in order to protect themselves from the winner's curse. This will be higher if the owner also has the expert failed visit to the auction object.