Adapted from “How to Win an Auction – And Avoid the Sinking Feeling that You Overbid,” first published in the Negotiation newsletter, January 2008.
We have all been in situations in which we are pitted against others in competition for a certain item, whether an award, a promotion, or even in an auction. This competitive atmosphere pushes you to ‘play’ harder than you normally would, overvaluing your objective and over-assessing the importance of victory. Often when a group of people are vying for the same thing, the winner of the auction is revealed to have been overly optimistic about the value of the objective and thus is a victim of the “winner’s curse,” typically described as paying more than the asset is actually worth. The January 2008 issue of the Negotiation newsletter offers three helpful pieces of advice for avoiding the “winner’s curse.”
First, determine the type of asset being auctioned, namely whether it is a “private-value” asset or a “common-value” asset. “Private-value” assets offer unique value to different bidders based upon their individual utilization of that asset. “Common-value” assets have equal value to all bidders, or, in other words, its utility to each actor “would provide equal value to all of them.” If the asset is exclusively a private-value asset then the winner need not worry about the “winner’s curse.” Often, however, the asset is a hybrid of the two, forcing the bidder to assess which of the two values is most useful or important to her.
Second, along with determining whether an asset is private or common-value, the savvy bidder should try to determine if she has an edge over other bidders in utilizing the asset. To quote Bruce Wasserstein, “I think it’s the winner’s dilemma more than a curse: anytime you’re the buyer you wonder why the other [bidders] didn’t want it.” Overcoming this obstacle is a matter of accurately assessing your comparative advantage over other bidders in the utilization of an asset, or “the unique knowledge, capabilities or resources that you might bring to an auction.”
Last, plan for the future while accounting for the past. In other words, ask yourself if you will feel comfortable about making this bid and what has brought you this far in the auction. After determining whether the asset is of private or “common-value,” and assessing your relative comparative advantage with regard to other bidders, ask yourself how you will bring these things together in order to make your winning bid on that is both effective and without regrets.