winner's curse

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Winner's curse

Problem faced by uninformed bidders. For example, in an initial public offering uninformed participants are likely to receive larger allotments of issues that informed participants know are overpriced.

Winner's Curse

In auctions, the tendency for the winning bid to exceed the intrinsic value of what is being offered. This trend was first noted among energy companies during auctions for bidding rights to drill in the Gulf of Mexico. It is thought that insufficient information and, perhaps more so, the emotional desire to win in the heat of an auction contribute to the winner's curse. See also: Behavioral economics.

winner's curse

The likelihood the winning bidder in an auction of several bidders will pay too high a price. From an investor's standpoint, the winner's curse implies the stockholders of the firm acquired in a merger will benefit at the expense of the stockholders of the acquiring firm when several potential acquirers are involved in the bidding.

winner's curse

the possibility that the winning bidder in an AUCTION will pay too much for an ASSET since the highest bidder places a higher value on the asset then all other bidders. For example, the winning bidder in a TAKEOVER BID may pay too much for the assets and trading connections of the JOINT-STOCK COMPANY that he has bought, because the price that he has paid has been bid up by competing bidders.
References in periodicals archive ?
Thaler goes so far as to say: "[t]he winners curse cannot occur if all the bidders are rational.
Given the winners curse, uninformed investors will only submit purchase orders, if on average, IPOs are underpriced sufficiently to compensate them for the bias in the allocation of new issues.
Appraisers are often after the most probable highest bid, which, because of the winners curse mentioned above, may not be the winning bid.
This is a version of the winners curse (Cox and Issac, 1984; Thaler, 1992), a notion debated by many, including Brown (1986), Thiel (1988), Levin and Smith (1991), and Perri (1995).