Game Theory 101 (#72): The Winner's Curse, Part 1

Imagine you are about to bid in an auction to buy an oil field. You send a prospector out to estimate its value, and he informs that the area is flush with oil that can be extracted for a low price. Should you bid aggressively on it?

The winner's curse indicates that doing so is likely to backfire. This lecture explains the problem. Next time, we will cover the solution.

[ahmadrezaalef]

You just analyzed the low signal pay off and when the oil field is worth 25 M, P 1 receive a low signal and P 2 receive a high signal, so from each of the player standpoint, it cannot imply a signal being low or high has direct relationship with the signal type for the case 25 M. An in other cases both players either receive low signal (0) or high signals (50 M). So, when received a low /high signal, you cannot judge about the type of the signal other player received!!!!

[Huzf]

If you have a high signal you should bid a very, very high amount of money, because if the other received a low-signal he will offer 12.5m and you only have to pay his offer because its a second bid auction and in that case you are in positive since you only pay 12.5m and you receive 25m. If the other received a high signal the same applies

[jvgama]

I should bid $0 for the low signal (either the other player got the low signal and it means the field values 0, either it received the high signal and he will bid more anyway), and I should bid $50m for the high signal (either the other player received the low signal, and I am indifferent about any value above 0$; or the other player received the high signal in which case any bid different from $50m would not be optimal).

[PunmasterSTP]

Winner’s Curse? More like “Whoa, this could fill your purse!”…if you have a purse and use the lessons gained from these videos to make more money.