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Common value auctions. The same value for everyone, but different bidders have different information about the underlying value. Auction a jar full of coins ( asking for an estimation) average bid will be significantly less than the value of the coins (bidders are risk averse)
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Common value auctions The same value for everyone, but different bidders have different information about the underlying value
Auction a jar full of coins (asking for an estimation) • average bid will be significantly less than the value of the coins (bidders are risk averse) • winning bid exceeds the value of the jar Bazerman & Samuelson, 1983, 48 auctions • True value $8 • Estimated (mean) $5.13 • Bias in estimation + risk aversion should work against over bidding • Yet mean winning $10.01
Question first raised by Capen, Clapp and Campbell 1971. • This is an example of a problem that comes from a field observation before becoming theory.
Winner's curse cannot occur among rational bidders (Cox and Isaac 1984). • Challenge to assumption of rationality. • But acting rationaly is difficult. Need to distinguish between: • expected value of the object, conditioned on prior information • expected value of the object, conditioned on winning the auction
Example. You have to advise the takover of firm T. • T knows the true value, you don't: Assymetry of information. Optimal to bid ? Cero patatero Extreme case of winner's curse.
Experimental evidence (Bazerman & Samuelson 1985): Only 9% bid zero. Majority in [$50-$75]. • Would learning solve the anomaly? (Weiner, Bazerman & Carroll 1987).
Each subject (MBA) repeated it 20 times with feedback about true value and whether their bid was accepted and profit. Of 69 subjects 5 learned to bid 1 or less by the end of the 20 rounds. Learning seem not to be easy or fast.
Shell’s boss calls me about a bid • Calls me again to tell me that the number of bidders has increased • Should I increase or lower my previous bid?
need to bid more aggressively to win • if you win more likely that you have overestimated. • Solving it not trivial. Do people get it right?
Series of experiments by Kagel, Levin et al. True value x* varies from trial to trial but always between xl and xh. • Prior is given to each one by drawing xi from uniform x*±∆. • Increase in N -> more losses. • Teatments: a) change of type of auction (first, second), N and ∆. Compare results with RNNE. • This done also with construction firm managers (last price) Rules of thumb.
Field data. Oil tracks, Corporate takeovers, Publishing auctions. At least prevalence of mild form of winner's curse: unfulfilled expectations. • Why is this important? It is part of a general problem of after decision blues. Bidders are under a cognitive illusion that makes them incur in systematic errors. • What strategy to follow once you have discovered the winner’s curse? Reduce your bids and sell short others’ shares?
Why people succumb to it? • “The value of victory”: Humans assign significant future value to victories over humans but not over computer opponents, even though such victories may incur immediate losses