The winner’s curse in negotiations— when a negotiator overbids for an item due to competitive pressure or other non-value related factors—is a major pitfall that integrative bargainers should certainly seek to avoid. In our article, Winner’s Curse – Negotiation Mistakes to Avoid, we offer some negotiation strategies you can use at the negotiation table in order to avoid the winner’s curse and achieve a win “without regrets.” There are two main reasons the winner’s curse is a common and dangerous trap in negotiations.
Winner’s Curse in Negotiations Tip 1. Your gains depend on the other side’s acceptance
After some coaching, many negotiators realize that an optimal bid is zero in our negotiation role play simulation, Acquiring a Company exercise, yet most readers without negotiation training will make a positive offer. When we bid on something, our gains depend on acceptance by the other party. This acceptance is most likely to occur under conditions undesirable to the bidder and favorable to the seller. Across many types of negotiation, whether business negotiations or international negotiations, most people fail to make this connection. Groucho Marx demonstrated his grasp of the winner’s curse when he said that he didn’t want to belong to any club that would have him as a member.
Winner’s Curse in Negotiations Tip 2. The other side knows more than you do.
After falling victim to the winner’s curse in negotiations, you are likely to notice that the other party – who is almost always the seller – was much better informed than you were about the terms of the deal. When you’re bidding on a commodity you know little about, your uncertainty is heightened. When you’re presenting this bid to an informed opponent, your expected return from the transaction will decrease dramatically. The average negotiator will accept your offer only when the actual thing bargained over is worth less than your estimate.
In negotiation research that earned him the Nobel Prize, George Akerlof, Koshland Professor of Economics at the University of California, Berkeley, showed that the selective acceptance of offers can lead not only to bad outcomes for buyers but to market distortions. The used car market offers a graphic illustration of the consequences of widespread fear of the winner’s curse in bargaining scenarios. As most of us understand, the average used car on the market is hardly “average” in quality. If it were, the owner would have hung on to it or perhaps sold it to a relative or a friend. The bigger the lemon, the more likely it is to enter the marketplace. Intuiting this fact, most people approach used cars with caution: most car buyers will bid low and get ready to walk away. In this fashion, the average quality and price of a used car becomes distorted, as does the used car market as a whole.
We would love to hear your opinions regarding the winner’s curse. Share them with us in the comments.
Related Negotiation Skills Article: Business Negotiation Techniques and Dealmaking – Bargaining with Agents
Originally published in 2013.
My graduate class in negotiation and mediation recently focused on errors in perception and cognitive biases in negotiations. The students are always interested in hearing about the “winner’s curse.” The example that I traditionally give is based on the following scenario. The longtime owner of a condo situated in an up-and-coming neighborhood in the city of Boston has paid off the original mortgage of $100,000. Prices have been rising dramatically as demand has outpaced supply. Up-to-the-minute research indicates sales of similar condos are taking place in the $400,000-$600,000 range. Hoping to reach a target in the upper end of that range, the owner lists the property with an aspiration price of $720,000 (20% more than she expects to receive.) The first weekend the condo was on the market a prospective buyer visits the property. After a brief showing, the intuitive buyer announces “I’ll take it.” No concessions are asked for. The buyer signs an offer to purchase and includes a check of $72,000 effectively taking the property off the market. They will close on the property at the end of the month. The seller has difficulty disguising how elated she is to achieve her asking price. She feels she has “won” this negotiation. But at 4 o’clock in the morning, she wakes up from a restless sleep, takes another look at the agreement and the check for 10% of the asking price. Falling under the full weight of the winner’s curse, she laments “I could’ve done better.”