Why you will always pay more at auction [The Winner’s Curse]

22 March 2021

The Winner’s Curse is a tendency that the winning bid at an auction will generally exceed the intrinsic or inherent worth of the item.

A great illustration of the Winner’s Curse was best conveyed by behavioural economist Richard Thaler. Whereby as a social experiment a professor would fill a jar of pennies and conduct an auction to the class. Chances are very high that the following results would occur.

  1. The average bid would be significantly less than the value of the coins (bidders are risk averse)
  2. The winning bid will exceed the value of the jar.

If we somehow apply this phenomenon to the auction process, we can find that unlike a jar of pennies, the true value of the property is completely unknown.

If we take the group of people who made a bid as willing buyers. We can assume at that given moment in time the average of all bids from willing buyers at auction can be a strong representation of its value to the people who where most interested in buying the property. The winning bid will always be higher than the average bid.

Next time you are at an auction, take note of the bids and calculate the average compared with the sale price and note the difference.

Alexander Gibson

Does your strategy yield results?

Do you want to buy property while avoiding the stress of an auction?

Recent Articles

Widen your understanding with these articles

The Ultimate Guide On How To Add Value To Your Property: Expert Tips

Are you a homeowner looking to boost the value of your property? Look no further! In this comprehensive guide, we will provide you with expert tips and strategies to increase the value of your property. Whether you are planning to sell in the near future or simply want to enhance the market worth of your home, this guide has got you covered.

How Make An Offer On A Property (NSW)

Sick of auctions? How to make an offer on a property that is irresistible to the vendor

Do real estate agents have to disclose deaths

This tells you once and for all what real estate agent have to disclose in regard to death and the sale of property

Complete Guide: The hidden costs to buy a house

A complete guide to the costs of purchasing property

Do real estate agents lie about other ‘offers’?

Real Estate Agents are always under scrutiny in their day-to-day dealings. This is because of the nature of their industry, the stakes are at their highest. We are talking about the biggest asset purchase or sale in both the vendor’s and buyer’s lives. We are talking about risking their own money and debt. There is only one property available and there can be only one winner and everyone else is the loser. There are no prizes for coming in second.

Should I Buy or Sell First?

Should I Buy or Sell? The answer lies with you and your circumstances

What is a buyers agent

A buyers agent or buyers’ advocate is a licensed real estate agent who is procured by a prospective property purchaser to facilitate the acquisition of a property based on achieving the specific goals of the buyer. The buyers’ agent is tasked with sourcing, evaluating, appraising, negotiating, and securing property on behalf of their client.

What are buyers agent fees? How are they calculated?

In NSW, commissions are completely deregulated; meaning the fee and the structure is completely negotiable and this applies to buyer’s agents not just real estate agents.

Why are we still nervous in the face of economic uncertainty? Is now the right time to buy?

With the election over, have we become more certain about the future? Probably not.

Looking to ‘add value’ to the attic space of an apartment [Cautionary Tale]

A common marketing strategy for agents that sell top floor apartments is to spruik the potential to use the attic space as the main draw card for the property. But be careful, I’ll tell you why.