What is the winner’s curse in competitive bidding situations, such as auctions? The winner’s curse describes a common problem in negotiation: The party who wins an auction of a commodity of uncertain value with a fair number of bidders typically pays more than the asset is actually worth. The winner’s curse is a risk in any auction of an item of questionable value. Because it can leave the “winner” of an auction feeling like they lost, it’s an experience you will want to avoid.
To take a simple illustration of the winner’s curse, imagine that at the beginning of class, a professor produces a jar full of coins and announces that he is auctioning it off. Students can write down a bid, he explains, and the highest bidder wins the contents of the jar in exchange for their bid.
After everyone has written down their bids, the professor polls the class to find out how they bid. Bob turns out to be the high bidder, at $45.
“Congratulations, Bob, you’ve just won all the coins in the jar!” the professor says. “How do you feel?”
“Lousy,” says Bob, before even hearing how much money the jar contains.
Winner’s Curse: Negotiation Scenarios in Competitive Bidding
This simple game is a classic illustration of the winner’s curse phenomenon in competitive bidding. When you are the highest bidder in an auction, this is often a sign that you overpaid.
Auctions pervade our world, from mergers-and-acquisitions deals and procurement auctions to eBay. To avoid becoming the next victim of the winner’s curse, follow these three guidelines:
- Analyze whether the asset has a common value element. A common value asset, like a jar of coins, has equal value to all bidders. If so, bid with caution.
- Assess whether you know more about the value of the item up for sale and compare your knowledge with that of other bidders. Is it possible that they know more than you do about its worth? If so, you should probably refrain from bidding.
- If you do feel you have an accurate assessment of the item’s worth, before placing each bid, pause to consider how you would feel if you won the auction.
Too many winners of auctions end up feeling cursed by their victories. And Bob was correct in feeling lousy. The jar he won contained about $20 in coins.
In your next competitive bidding scenario, remember that winning isn’t always the most optimal option. Evaluate your BATNA, or best alternative to a negotiated agreement, just as you would in a regular bargaining scenario. If your best alternative to winning the auction is to not win the auction, then tailor your bidding accordingly to head off the “need to succeed” at all costs.
Continue the Discussion
Have you ever fell victim to the winner’s curse? Share your story in the comments.
Related Business Negotiations Article: A Win Without Regrets: Winning an Auction and Not Feeling Disappointed
Related Dealmaking Article: The Winner’s Curse
Originally published in 2008.
This post brilliantly highlights the often-overlooked pitfalls of the winner’s curse in negotiations. It’s easy to get caught up in the excitement of winning a deal, but your insights on the long-term consequences are invaluable. Thanks for sharing these practical tips to avoid such mistakes!