BazermanMoore

60 Chapter 3: Bounded Awareness
Bids (B)
Estimates (E)
B
E
Variables
E = Estimates
B = Bid
Assumptions
1. True value ∝ E
2. True value will be equal for
all bidders
Figure 3.2
Graphic Illustration of the Winner’s Curse
Source: (Bazerman & Samuelson, 1983), ‘‘I Won the Auction But Don’t Want the Prize.’’ Journal of Conflict
Resolution 27, pp. 618–634. Copyright # by Sage Publications, Inc. Reprinted by permission of Sage
Publications, Inc.
provides a graphic depiction of what may have occurred. Curve E shows the distribution
of bidder estimates for the true value of the commodity, and curve B depicts the
distribution of bids. The depiction assumes that (1) the mean of the distribution is
equal to the true value of the commodity—that is, no aggregate under- or overestimation
is expected; and (2) bidders discount their estimates a fixed amount in making bids,
which explains the leftward shift of the bid distribution. The figure suggests that a winning
bid—that is, one from the right tail of the distribution—is likely to exceed the
actual value of the commodity. The highest bidder is likely to have been one of the
highest estimators, and unless they had reason to believe that they had better information
than the other bidders, overpayment is likely. In fact, our research found that the
winning bidder in auctions of highly uncertain commodities with a large number of
bidders commonly pays more than the commodity is worth.
Why does the winning bidder fall prey to the winner’s curse? Because of the information
that is excluded from his or her thought processes—in other words, because of
bounded awareness. If a particular bidder or bidding group assumes that their bid will
win the auction, their assumption should tell them that they are likely to have overestimated
the value of the commodity in comparison to other bidders. Based on this reasoning,
bidders on highly uncertain commodities who are competing against a large
number of other bidders should adjust their estimates of the true value of the commodity
downward and lower their bids accordingly. Thus, if they do win, they are less likely