The Winner's Curse
In auction theory, under certain conditions, the bidder who wins tends to have overpaid. Consider oil firms bidding for drilling rights; companies estimate the size of the reserves, and estimates differ across firms. The average of all the firms' estimates would usually approximate the true reserve size. Since the firm with the highest estimate bids the most, the auction winner systematically overestimates, sometimes so substantially as to lose money in net terms [1]. When bidders are cognizant of the statistical processes of estimates and bids, they correct for the winner's curse by shading their bids down. This is why experienced bidders sometimes avoid the curse, as opposed to inexperienced ones [
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