medium · GRE Verbal
In auctions for assets of uncertain value—offshore oil tracts, broadcast spectrum, a struggling firm—the bidder who wins may have cause for regret rather than celebration. Each participant estimates the prize's worth, and those estimates scatter around the true figure; some are too low, some too high. The winning bid, almost by definition, comes from whoever estimated most optimistically, which means the victor has probably overpaid. Economists call this the winner's curse. Sophisticated bidders anticipate it and 'shade' their bids downward, offering less than their own best guess to leave a margin for error. The paradox is bracing: in such contests, the naive strategy of bidding exactly what you think the asset is worth is close to a recipe for losing money.
The passage suggests that a bidder who offers exactly his own estimate of an asset's value is likely to
- Manage to win the auction only on the rarest of occasions
- Protect himself quite effectively against the winner's curse
- Overpay when he wins, since winning signals too high an estimate
- Underestimate the asset's value more often than his rivals do
- Compel the sophisticated bidders to raise their own offers
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