Source:wikipedia.Common Value Auction- an environment in which information about the value of the object for sale is dispersed among bidders.Incomplete Information- an economic situation or game in which knowledge about other market participants or players is NOT available to all participants. NO player knows the payoffs and strategies available to other players.
US federal government conducted an auction of potentially valuable oil leases in the Gulf of Mexico. Companies had no experience bidding on such leases, but they did have access to standard geological methods for estimating their value. In hindsight, one can now see that the oil leases fetched prices that were too high. The winning bidders, who paid millions of dollars for their leases, would have earned a much higher return on their investments had they deposited the same money in a savings account.
After 3G, The mobile voice bill for an average consumer is set to rise by 20 per cent and data charges by 20 times!Auction allocated spectrum efficiently rather than govt bureaucrats deciding the allocation but it fails to ensure that those who get the license don’t pay more than the true value of the licenses.
"As the duration of the auction prolongs, people feel attached to the product," Pseudo Endowment Effect.They compulsively check items, imagine themselves owning a product or simply want bragging rights for placing a winning bid.
If investors are maximizing the amount of land bought or the oil reserves purchased, then they are right. But if they want to maximize theirprofits, they should bid lower.
He is the richest who is contentwith the least, for content is the wealth of nature. ~Socrates 2
WINNERS’ CURSE How?How can a win possibly be a curse? 3
A tendency for the winning bid in an auction to exceed the intrinsic value of the item purchased.Because of incomplete information, emotions or any other number of factors regarding the item being auctioned, bidders can have a difficult time determining the items intrinsic value. As a result, the largest overestimation of an items value ends up winning the auction.Conditions generally ending in Winner’s Curse: Common value auctions Incomplete information 4
Popular Example US federal government conducted an auction ofpotentially valuable oil leases in the Gulf of Mexico. Companies had no experience bidding on such leases, but they did have access to standard geological methods for estimating their value. Inhindsight, we see that the oil leases fetched prices that were too high.In fact, the returns from a savings account wouldhave been much higher than the winning bidders, who paid millions of dollars for their leases. 5
Decision Making in spectrum allocation policyBetween 2004 and 2009 when thespectrum allocations were through afixed-price policy. Then, 2G scam happened. 3G spectrum allocation was, hence, through Auctions. 6
Indian Telecom Since 2010…3G spectrum Auction in 2010: In 3G auctions, the operators suffering from Winner’s Curse overbid the actual price of spectrum and now reviving their costs from market. For the first time in the country’s 17-year mobile telecom history, call rates have increased. The mobile voice bill for an average consumer is set to rise by 20 per cent and data charges by 20 times! 7
Between 2004 and 2009 when the spectrum allocations were through a fixed-price policy, receiving calls became free and charges dropped a further 90 percent, leading to another 600 million people becoming mobile-enabled. 8
Winner’s curse does NOT affectevery auction. BATMAN’s collector item on E-bay will be worth 10$ to one person and 100$ to another. Actual value might be pretty lower. Due to pseudo endowment effect, private value is attached to it. And hence, it is not the example of common value auction. If buyer’s estimate of an asset’s value isaffected only by his own perceptions andNOT by perception of others, he would be willing to pay up to his valuation. 9
In case of IPOsInvestors have different informationabout the fair value of the shares.Uninformed investors subscribe toevery IPO, informed investors only buynew shares if the issue price if less thanthe fair value. This causes a Winner’scurse for the uninformed investors. 10
Bid Strategy as devised by Capen, Clapp and Campbellin their researchEvidence was found by CCC that one should bid lower inauctions to avoid loosing too much money. Three basicguidelines are given for a better bid strategy:1. The less information one has compared with what the opponents have, the lower one should bid.2. The more uncertain one is about the value estimate, the lower one should bid.3. The more bidders (above three) that show up on a given parcel, the lower one should bid. 11
ConclusionBehavioral analysis wrt Winner’s CurseIt is true that one should be aware of this fact when entering a bidding situation. But it is probably also true that some of your fellow bidders will not know of this phenomenon. What should you do? Lowering your bid is what seems reasonable, but… if you are the only one doing so, then chances of having a winning bid will be next to nil. You might even consider not bidding at all, but this is not satisfactory unless you want to quit your business.What you can do is share your knowledge. The more informedplayers in a bidding game there are, the less is the effect of the Winners Curse. If you can convince the other players to lower their bids as well, then the bidding game will be profitable again. 12
So What’s the bottom line ??? If you want to be an entrepreneur who wants to be successful at trying to bid on projects large and small, try to keep thewinner’s curse in your head and the number of people in the room while deciding yournext bid. With experience and a sight for thewinner’s curse, you’ll become a great bidder. 13