How to avoid 'The Winner's Curse'

"Back in the 1980s, a young economist and future Nobel winner named Richard Thaler began writing a series of columns that challenged the dominant doctrine of his field. At the time, most of the economics profession was smitten with a cartoonish picture of human behavior. A depiction of humans as selfish, smart, calculating, and self-controlled creatures who optimally choose what's best for themselves. It had become a bedrock of the mathematical models economists used to describe and sometimes glorify the free market."

"One anomaly Thaler highlighted was what he called "The Winner's Curse." The winner's curse refers to the winners of auctions. That includes the classic auction with auctioneers speaking really fast, selling antiques or paintings or whatever. But it also applies to markets where people competitively bid against each other to buy something, which includes things like bidding wars over buying a house, companies competing to acquire other companies, and sports teams fighting to sign star rookies in a draft."

In the 1980s Richard Thaler challenged the standard economic model that portrays humans as selfish, perfectly rational, and self-controlled decision-makers. He identified systematic anomalies where real human behavior departs from those assumptions. One key anomaly, the Winner's Curse, shows auction winners often overpay because competitive bidding and imperfect information cause misvaluation. The Winner's Curse appears in traditional auctions and in markets such as housing bidding wars, corporate acquisitions, and sports-draft competition. Behavioral economics draws on psychology to build richer models that reflect actual decision-making and market outcomes.

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