The Winner's Curse

This phenomenon is known as Winner's Curse. Let us take an example
and then we will talk on it.

A teacher comes in a
room with coin filled in a glass jar.The teacher gives option to the
student to guess for the total amount of money, the guy guessing largest amount of money
will be getting the jar for that price. Almost more than 60% of the student will be
bidding for nearest value of the sum in jar adhering to wisdom
of crowd and some will bid for quite lesser than the actual sum and
some will go for more than the actual sum. The guy winning the bid has paid more than
the item auctioned values. The winner always gets the feeling that he
overpaid.

First of all, let's see what common
value auction means. Common value auction is the type of auction where the item has got
a fixed value for all participant for example a 8-GB USB drive. Its market value is
fixed and costs equal for all. So, when in auction most of the people will be bidding
near the market value but the guy winning the bid must be bidding higher than other
fellows i.e. higher than its market price. So, after getting the product he gets a
felling that he could have bought it in lesser price in market.So, it becomes a losing
situation.

If the auction is not common value
auction then there is different situation. Lets take example for bidding of bat-mask and
bat-belt. I am a bat man fan so I could want to buy it for $150 but for one of my friend
who doesn't like batman at all it could have a value of less than $10. So , in this
case, the winner is not necessarily loser. One of the way to avoid winner's curse is to
bid closets to market price.

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