Written by Marie Rutkoski
What is The Winner’s Curse?
Most of the times traders are ruled by their emotions which inspires them to take the risks associated with trading and bidding anticipating the profits they might earn.
The winner’s curse is when the winning bid in an auction ends up paying more than the intrinsic value of the item purchased in the bid. This is a phenomenon that actually explains the role of emotions in trading and auctions.
Winner’s Curse: How to avoid it?
Trading is often associated with risks which make many term it as gambling. But despite the risks, the profits are immense and thus many traders and successful ones are risk takers. But Winner’s Curse applies to winning an auction where you bid for an item. It is when you do not know the value of the item and end up paying many times the intrinsic value of that item.
Importance of assessing the value of the item being bid
Determining the intrinsic value of the item that you bid for is very important. One should not allow emotions to take control over the emotional value associated with the product. It is simple human tendency to think emotionally rather than practically and rationally. Winner’s curse is also when you are being irrational about something without gauging the item’s value as an asset. This team was originally coined during the time when companies were bidding for offshore oil drilling rights in the Gulf of Mexico.