4 ms·
Intuitively, you might think "I'll just bid a few cents less than what the thing is worth to me, then I'll get a fair deal". However: 1. You likely don't know
by yccs27 3y ago
Intuitively, you might think "I'll just bid a few cents less than what the thing is worth to me, then I'll get a fair deal". However:
1. You likely don't know the value exactly, so you might overbid (or underbid)
2. If you overbid, you will probably get the thing and lose money
3. If you underbid, you are less likely to be awarded the thing, so on average the gains (from getting it below value) are lower than the losses (from overpaying).
4. The Big Insight: To still get a good deal on your average auction win, you need to adjust your bid downwards to account for your imperfect knowledge.
- crdrost 3y agoYes. It's not a terribly interesting article but I would describe it from an external perspective as, "People bid based on a sort of mean value: they don't know how much this thing is worth to them, so they make an uncertain guess, that guess has a mean. "But, that guess also has a standard deviation. And if you have 100 identical people doing a one-time closed bid on the thing, they all have identical mean valuations but the bid that will win will probably be 2-3 standard deviations over the mean. In these situations, the more wrong you are, the more likely you are to win, and the less you will like what you win. This is the winner's curse. "You can avoid this by being cognizant of your status as one of the pool of 'identical people', how many people are similar to you, and tempering your bids downward in relation to that. A jar full of money has a similar value to everyone who is in the audience -- this creates the dangerous condition! A unique statement piece from an otherwise unremarkable artist, is going to attract some interested parties and some revulsion: so if you dig it, you are probably in the minority and don't need to worry so much about the winner's curse."
- User23 3y agoOverbidding has guaranteed downside. Underbidding has non-guaranteed upside. It’s pretty clear that if you’re playing an iterated game then you always underbid. Of course it’s a different story if it’s a unique item that you really want.
- deleted 3y ago[deleted]
- tomcam 3y agoMethinks you just restated GP’s points with slightly less clarity
- WalterBright 3y agoIt's just discounting one's bid by the amount of the perceived risk. For example, we discount the price of a used car by an estimate of how much of its useful life is used up. But that cannot be gauged precisely, hence risk. We discount the price even further if bought from an individual rather than a used car dealer, because the risk of hidden defects is higher. Risky investments are priced lower than more secure investments. Many people say that free markets require perfect information. They don't, not at all. The imperfect information is called "risk" and affects the price accordingly.
- tomcam 3y agoNot surprisingly, your explanation is the most coherent of all of them
- WalterBright 3y agoAnother way risk is reduced by paying more is purchasing warranties and insurance.
- hgsgm 3y agoNo, that poster's #3 added the key insight.
- JamesBarney 3y agoOr to put it another way. Everyone has incomplete information. If you bid more than everyone else it's because one of the following is true. 1. It is more valuable to you than anyone else. 2. Everyone else is mistakenly undervaluing it 3. You are mistakenly overvaluing it If you don't have inside information, or have a unique reason why it is worth more to you than anyone else. Then 3 is far more likely than 2.
- grotorea 3y agoCould you say this is "wisdom of the crowds" working against the bidder?