winner's curse
Overpaying to prevail
Winner's curse is the tendency for auction winners to overpay.
The winning bid, by definition, exceeds what everyone else thought the item was worth—suggesting the winner overestimated its value.
The concept extends beyond auctions: in competitive bidding for contracts, acquisitions, or free agents, the most optimistic estimate often wins, and optimism often proves wrong.
They paid $50 million for a pitcher who never won another game—classic winner's curse.
Pre-contract hidden knowledge problem
- market failureInefficient resource distribution
- game theoryStudy of strategic interaction
- expected valueProbability-weighted outcome average
- equilibriumState of balance
Expanded with gas
- overestimateJudge as greater than
- overpayPay excessive amount
- overvalueEstimate worth too highly
- mispricingIncorrect cost assignment
overoptimism · overbid · overreach · misjudgment · unrealistic · overhype · miscalculation · overconfidence
Corporate consolidations
- acquisitionsThings newly gained
- takeoverAssuming command of something
- M&ACorporate buyouts and combinations
- deal-makingNegotiating agreements between parties
synergy · premium · target company · hostile bid · bidding war · overpayment · integration · shareholder value
Offer excessive price
- overpayPay excessive amount
- biddingOffering prices or obeying
- outbidOffer more than another
- valuationAssessment of monetary worth
appraisal · reserve price · hammer price · competitive bidding · sealed bid · lot · paddle · increment
adverse selection
Pre-contract hidden knowledge problem
- market failureInefficient resource distribution
- game theoryStudy of strategic interaction
- expected valueProbability-weighted outcome average
inflated
Expanded with gas
- overestimateJudge as greater than
- overpayPay excessive amount
- overvalueEstimate worth too highly
mispricing · overoptimism · overbid · overreach · misjudgment · unrealistic · overhype · miscalculation · overconfidence · irrational exuberance
mergers
Corporate consolidations
- acquisitionsThings newly gained
- takeoverAssuming command of something
- M&ACorporate buyouts and combinations
deal-making · synergy · premium · target company · hostile bid · bidding war · overpayment · integration · shareholder value · due diligence
overbid
Offer excessive price
valuation · appraisal · reserve price · hammer price · competitive bidding · sealed bid · lot · paddle · increment · proxy bid
- auctionsauction, bidding, bid, auctioneer, auction house
- behavioral economicsloss aversion, nudge, anchoring, cognitive bias, heuristics