Winner’s Curse and Bidding Optimization
https://gbr.pepperdine.edu/2010/08/the-winners-curse-and-optimal-auction-bidding-strategies/
This article discusses bidding environments and how to develop good strategies in said environments. Examples of items offered at auctions include real estate, mineral rights, construction contracts, and agricultural products. Different types of auctions are then explained, such as the English and Dutch auctions that we analyzed closely in class. One type of auction that did not get discussed in class is the Vickery auction in which the second highest bid wins. This is similar to the second price bid that we did discuss; however, the bid in a Vickery auction determines the amount the winner pays as well as whether the a bidder wins or not.
Next, the author discuss the “winner’s curse.” This is precisely the difference between the winning bid and the true value for the item in question to the bidder. An example of the “winner’s curse” is described as so: when auctioning a jar of coins to a classroom of students, the wining bid often exceeds the value of the coins inside the jar. The difference between the winning bid and the value of the coins in the jar is known as the “winner’s curse.”
In order to limit or prevent the “winner’s curse,” the authors explore several auction simulations, claiming that it is the most effective way to analyze the bidding situations. Through simulation comes the idea that in order to minimize the curse, a bidder must hedge one’s bid. This entails bidding a percentage of one’s true value. This is opposed to the strategies we covered in class, as these are based on simulation, and class analysis was not. The simulations studied in the article always encouraged some sort of hedging in order to maximize profit. Bidders who did not hedge had a higher probability of winning, but low profit, and vice versa.