First Price common value auctions: Bidder behavior and the winner’s curse John Kagel, Dan Levin, Raymon Battaglio & Donal Meyer.

What is the winner’s curse? In common value auctions with incomplete information auctions the winner will tend to overpay. The winning bid exceeds the value of the auctioned asset. This implies that the value of the asset is less than the bidder anticipated.

What is the winner´s curse? Is the bidders’ failure to account for the adverse selection problem inherent in winning auctions for items of uncertain value. Overpayment will generally occur only if the winner fails to account for the winner's curse when bidding. What does the revenue equivalence theorem says about this?

Adverse Selection Problem Not being able to distinguish between good and bad signals. Incorporate the signal in the bidding without deflating the possibility of a deviation from the common value.

Research question Research question: Does the winners curse exist in this auction framework? and if it does, what is its duration, it’s relation to experience and it´s breadth of impact across agents? Context: experimental sealed-bid auctions for objects of uncertain value. Why? Why not field data?

Method Experimental Method As in a first price sealed bid: the high bidder gets the object, the bids are private and the reservation value is zero. -N>2 Players -The value of the object was drawn from a Uniform Distribution (V is unknown)

Method Each individual received a signal In general But for a given auction

Method In general this bid will avoid losses. The subjects have the following profit per round.

Method Each individual was endowed with 8 $ or 10$ to cover up initial losses and one overbid. Many experimental periods, the number varies according to the session. Subjects in each period had the opportunity to bid to get the asset and obtain profits. If their balance was negative (due to overvaluation) they had to leave the experiment and were paid 4$. (m subjects reruited;m>n)

Method Auctions survivors were paid their gains in the experiment.

Winner’s curse In the experiment there is a winners course whenever : 1) There is a strong positive rank order correlation between bids and private information signals. This will guarantee the existence of an adverse selection problem.

Winners curse 2) Also it is necessary that This condition means that subjects fail to deflate the items expected value accurately. These two conditions ( at least the higher bidder exceeding this expected value) are sufficient to insure negative profits.

Results High bidders earn negative average profits in the early auction periods (80% of these periods) with significant losses averaging $2.57 per period. Rank order correlation is significant since the Correlation coefficient exceeds 0.5 in 80% of the cases.

Results Approximately 60% of the bids exceeded In 82% of the cases the high signal holder won the bid. Posting the individual bids along with signal values did not attenuate the effect.

Results With experience the winners course is attenuated as bidders earned modest positive profits and the majority of bids were less than These adjustments are attributed to bankruptcy of the most aggressive bidders and survivors bidding less aggressively.

Results Nevertheless the winners curse still persists since profits are only 10 percent of the profit opportunities as defined by the SRNNE.

Is this study convincing? Is the design of the experiment accurate for the purpose of the research? Are the experiment conditions accurate to explain the “winner’s curse”? How about experienced bidders? How about other types of auction?