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.

The average bid would be significantly less than the value of the coins (bidders are risk averse)
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

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