Editing Winner's curse (section)

{{Short description|Tendency to overestimate in auctions}}
{{More footnotes|date=September 2020}}
[[File:Winner's Curse.png|thumb|upright=1.4|The effects the winner's curse phenomenon has on the price of an item]]
{{Auction}}
The '''winner's curse''' is a phenomenon that may occur in [[common value auction]]s, where all bidders have the same (''[[ex post]]'') value for an item but receive different private (''[[Ex-ante|ex ante]]'') signals about this value and wherein the winner is the bidder with the most optimistic evaluation of the asset and therefore will tend to overestimate and overpay. Accordingly, the winner will be "cursed" in one of two ways: either the winning bid will exceed the value of the auctioned asset making the winner worse off in absolute terms, or the value of the asset will be less than the bidder anticipated, so the bidder may garner a net gain but will be worse off than anticipated.<ref>{{citation|last=Thaler |first= Richard |year= 1988 |title= Anomalies: The Winner's Curse |journal= Journal of Economic Perspectives |volume= 2 |pages= 191–202 |doi= 10.1257/jep.2.1.191 |url= https://www.researchgate.net/publication/4719439 |access-date= 2018-10-19|doi-access= free }}
</ref><ref>{{citation|publisher=Investopedia |title= Winner's Curse |editor-last= Hayes |editor-first= Adam |url= https://www.investopedia.com/terms/w/winnerscurse.asp}}</ref> However, an actual overpayment will generally occur only if the winner fails to account for the winner's curse when bidding (an outcome that, according to the [[Revenue equivalence|revenue equivalence theorem]], need never occur).<ref>{{citation|last1=McAfee|first1= R. Preston |last2= McMillan |first2= John |title= Auctions and Bidding |journal= Journal of Economic Literature |volume= 25 |number= 2 |year= 1987 |pages= 699–738 |jstor= 2726107 }}</ref>

The winner’s curse phenomenon was first addressed in 1971 by three [[ARCO|Atlantic Richfield]] petroleum engineers who claimed that oil companies suffered unexpectedly low returns "year after year" in early [[Outer Continental Shelf]] oil lease auctions.<ref>{{cite journal |last1=Capen |last2=Clap |last3=Campbell |title=Competitive Bidding in High-Risk Situations |journal=Journal of Petroleum Technology |date=June 1971 |volume=23 |issue=6 |pages=641 to 643 |publisher=Society of Petroleum Engineers |issn=0149-2136|doi=10.2118/2993-PA }}</ref>  Outer Continental Shelf auctions are common value auctions, where the value of the oil in the ground is essentially the same to all bidders.