medium · GRE Verbal
In auctions where bidders must estimate the uncertain value of an item — an oil lease, say, whose true worth no one knows in advance — the winning bidder is often the one who most overestimated that value. Because each bid reflects a private guess, and because the highest guess wins, the victor has by definition made the most optimistic error in the room. This phenomenon, the so-called winner's curse, means that winning can itself be bad news: it suggests you paid more than the collective judgment of your rivals thought the item was worth. Sophisticated bidders therefore shade their bids downward, offering less than their raw estimate precisely to offset the tendency of victory to select for overvaluation. Novices who neglect this correction routinely win auctions only to lose money.
The passage implies that a bidder who consistently wins such auctions without shading bids downward is likely to
- Hold more accurate information than rivals
- Face unusually little competition from others
- Overpay relative to the item's actual value
- Push the auctioneer's reserve price upward
- Improve the accuracy of market estimates
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