Friday, 17 December 2010

" Winner's Curse "

Hi, not really a post, but something amusing I just came across in, of all places, the Oxford Dictionary Of Psychology!

Winner's Curse n. A tendency for the highest bid at an auction to exceed the true market value of the lot or prize. It arises from the fact that the bidders' estimates of the value of the prize are unreliable; some bidders are likely to underestimate the value and others to overestimate it, and it is the bidder who overestimates it the most who is likely to make the highest bid and to win the prize, in which case the winner is, in this sense, a loser. The effect has been confirmed by both experimental and field studies. It can be explored with the following demonstration, based on a classic experiment published in the Journal Of Conflict Resolution in 1983. Fill a jar with coins and auction it off to the highest bidder among a group of friends. The average bid will probably be less than the value of the coins, because of *risk aversion among bidders, but the winning bid will probably exceed the value of the coins, dramatically illustrating the winner's curse and providing a small profit for the auctioneer. The phenomenon was first discussed in an article on the purchase of oil-drilling rights in the Journal Of Petroleum Technology in 1971and was subsequently analysed in depth by the US economist Richard H. Thaler ( born 1945).

I never knew this phenomenon was scientific fact! Think I'll count up my penny jar later!

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