How to avoid the winner’s curse using game theory

Click Here: How To Avoid The Winner’s Curse Using Game Theory

Introduction (Via Mind Your Decisions)

I’ve made a huge mistake–GOB and others from Arrested Development

Strangely, in many auctions it is a huge mistake to win. Winning can either be unprofitable or less profitable than expected, kind of like a Pyrrhic victory. The tendency of the winner to overpay is more commonly known as the winner’s curse.

I have earlier described how the winner’s curse affects salary negotiations, oil drilling, and broadcast rights in my article understanding the winner’s curse. The essential feature of such auctions is the winner is bidding too high based on his information. As a consequence, the bidder wins in unprofitable or less profitable situations.

How can the winner’s curse be remedied? While there is no hard and fast rule, there is a principle that can help.

The idea is to bid like a winner or a consequentialist. This idea is described in the fine book The Art of Strategy and I have recast a problem from the text to illustrate.

Click Here: How To Avoid The Winner’s Curse Using Game Theory