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The Origin of the Winner's Curse: A Laboratory Study

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Author Info
Gary Charness
Dan Levin

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Abstract

The Winner's Curse (WC) is a robust and persistent deviation from theoretical predictions established in experimental economics and claimed to exist in field environments. Recent attempts to reconcile such deviation include "cursed equilibrium" and level-k reasoning. We design and implement a simplified version of the Acquiring-a-Company game that transformed the game to an individual-choice problem that still retains the adverse-selection problem. We further simplified the problem so that simple ordinal reasoning could replace both Bayesian updating and contingent thinking. Our results suggest that the WC reflects bounded rationality in that people have difficulties performing contingent reasoning on future events. (JEL D81, D82)

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Article provided by American Economic Association in its journal American Economic Journal: Microeconomics.

Volume (Year): 1 (2009)
Issue (Month): 1 (February)
Pages: 207-36
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Handle: RePEc:aea:aejmic:v:1:y:2009:i:1:p:207-36

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August. [Downloadable!] (restricted)
  2. Holt, Charles A & Sherman, Roger, 1994. "The Loser's Curse," American Economic Review, American Economic Association, vol. 84(3), pages 642-52, June. [Downloadable!] (restricted)
  3. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December. [Downloadable!]
  4. Robert Dorsey & Laura Razzolini, 2003. "Explaining Overbidding in First Price Auctions Using Controlled Lotteries," Experimental Economics, Springer, vol. 6(2), pages 123-140, October. [Downloadable!] (restricted)
  5. Ball, Sheryl B. & Bazerman, Max H. & Carroll, John S., 1991. "An evaluation of learning in the bilateral winner's curse," Organizational Behavior and Human Decision Processes, Elsevier, vol. 48(1), pages 1-22, February. [Downloadable!] (restricted)
  6. Roll, Richard, 1986. "The Hubris Hypothesis of Corporate Takeovers," Journal of Business, University of Chicago Press, vol. 59(2), pages 197-216, April. [Downloadable!] (restricted)
  7. Erik Eyster & Matthew Rabin, 2002. "Cursed Equilibrium," Department of Economics, Working Paper Series 1045, Department of Economics, Institute for Business and Economic Research, UC Berkeley. [Downloadable!]
  8. Colin M. Campbell & John H. Kagel & Dan Levin, 1999. "The Winner's Curse and Public Information in Common Value Auctions: Reply," American Economic Review, American Economic Association, vol. 89(1), pages 325-334, March. [Downloadable!] (restricted)
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  9. Hendricks, Kenneth & Porter, Robert H, 1988. "An Empirical Study of an Auction with Asymmetric Information," American Economic Review, American Economic Association, vol. 78(5), pages 865-83, December. [Downloadable!] (restricted)
  10. Reinhard Selten & Klaus Abbink & Ricarda Cox, 2005. "Learning Direction Theory and the Winner’s Curse," Experimental Economics, Springer, vol. 8(1), pages 5-20, April. [Downloadable!] (restricted)
  11. Gneezy, Uri & Potters, Jan, 1997. "An Experiment on Risk Taking and Evaluation Periods," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 631-45, May.
  12. Rock, Kevin, 1986. "Why new issues are underpriced," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 187-212. [Downloadable!] (restricted)
  13. Thaler, Richard H, 1988. "Anomalies: The Winner's Curse," Journal of Economic Perspectives, American Economic Association, vol. 2(1), pages 191-202, Winter. [Downloadable!] (restricted)
  14. Dyer, Douglas & Kagel, John H & Levin, Dan, 1989. "A Comparison of Naive and Experienced Bidders in Common Value Offer Auctions: A Laboratory Analysis," Economic Journal, Royal Economic Society, vol. 99(394), pages 108-15, March. [Downloadable!] (restricted)
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  15. Levin, Dan & Kagel, John H & Richard, Jean-Francois, 1996. "Revenue Effects and Information Processing in English Common Value Auctions," American Economic Review, American Economic Association, vol. 86(3), pages 442-60, June. [Downloadable!] (restricted)
  16. JEFFREY J. LElTZlNGER & JOSEPH E. STIGLITZ, 1984. "Information Externalities In Oil And Gas Leasing," Contemporary Economic Policy, Western Economic Association International, vol. 2(5), pages 44-57, 03. [Downloadable!] (restricted)
  17. Carroll, John S. & Bazerman, Max H. & Maury, Robin, 1988. "Negotiator cognitions: A descriptive approach to negotiators' understanding of their opponents," Organizational Behavior and Human Decision Processes, Elsevier, vol. 41(3), pages 352-370, June. [Downloadable!] (restricted)
  18. Levis, Mario, 1990. "The Winner's Curse Problem, Interest Costs and the Underpricing of Initial Public Offerings," Economic Journal, Royal Economic Society, vol. 100(399), pages 76-89, March. [Downloadable!] (restricted)
  19. Brit Grosskopf & Yoella Bereby-Meyer & Max Bazerman, 2007. "On the Robustness of the Winner’s Curse Phenomenon," Theory and Decision, Springer, vol. 63(4), pages 389-418, December. [Downloadable!] (restricted)
  20. Kagel, John H & Levin, Dan & Harstad, Ronald M, 1995. "Comparative Static Effects of Number of Bidders and Public Information on Behavior in Second-Price Common Value Auctions," International Journal of Game Theory, Springer, vol. 24(3), pages 293-319.
  21. Timothy Feddersen & Wolfgang Pesendorfer, 1996. "Convicting the Innocent: The Inferiority of Unanimous Jury Verdicts," Discussion Papers 1170, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  22. Gary Charness & Dan Levin, 2005. "When Optimal Choices Feel Wrong: A Laboratory Study of Bayesian Updating, Complexity, and Affect," American Economic Review, American Economic Association, vol. 95(4), pages 1300-1309, September. [Downloadable!]
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. John D. Burger & Stephen J.K. Walters, 2006. "The Existence and Persistence of a Winner’s Curse: New Evidence from the (Baseball) Field," Working Papers 0625, International Association of Sports Economists. [Downloadable!]
  2. Ricardo Gonçalves & John D Hey, 2007. "Experimental Evidence on English Auctions: Oral Outcry vs. Clock," Discussion Papers 07/09, Department of Economics, University of York. [Downloadable!]
  3. Vincent P. Crawford & Nagore Iriberri, 2005. "Level-k Auctions: Can a Non-Equilibrium Model of Strategic Thinking Explain the Winner's Curse and Overbidding in Private-Value Auctions?," Levine's Bibliography 784828000000000604, UCLA Department of Economics. [Downloadable!]
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