Why you overpaid at that online auction

Greg, I held a bit of a behavioral economics experiment the other day. I'm recording, testing. I can't hear myself. I got the whole indicator team together.

Let me go find a writing implement. And I auctioned off a jar of coins. Can you see that? They look like quarters.

Yeah, that's right. And those bids were binding. The colleague who bid the highest would need to actually pay me. But, you know, in return, they get that jar of coins. Okay, I'm going to hand it to Cooper. He can have a look. All right. Give it a good shake. You can write down your bids. This is your only opportunity. There's no more opportunity.

I'm so bad at these. How many things are in the jar game? This is my laundry dream. Okay.

Yeah. Build some tension. Two. One. Submit $5. $9.25. $7.75. Corey Bridges, you are the winner. $9.25. Congratulations. Was it exactly $9.25? The actual value is $8. So, Corey. Oh, man, you bid $9.25. You overpaid a little. I'm sorry. You know, I won and I lost. Um, it kind of stings. It kind of stings. I'm not gonna lie. So this is called the winner's curse. Oh, my gosh.

Well, we're gonna explain exactly what this curse means. Today on the show, we speak to the Nobel laureate who popularized the term. And we ask whether we might see the winner's curse in tech companies race to dominate AI

And I told him about that experiment with Dunn. And my colleague Cory Bridges bid $9.25 for the star of $8 worth of coins. So he overpaid. Do you have any words for him?

You should be worried because if there are a lot of bids coming in but you're bidding highest, that probably means you're the most optimistic about how much you think the thing is worth.

Richard has applied this in his own work in the private sector. In 2020, he joined a board of a company that was looking to buy other companies in the sports industry. And he noticed that a lot of the companies that it was looking to buy also had a lot of other bidders.

I feel like we've just had this wave of corporate breakups recently. Like Warner Brothers splitting with Discovery after their big merger.

But, Greg, this kind of left me feeling kind of nihilistic. So if there's a winner's curse, why engage in business at all? Does this not imply that anyone winning a bid for anything is likely to be overpaying? Should we all just shut up shop?

That's one way around it.

Well, congratulations.

Yeah, I use it pretty regularly.

So if there is an AI winner, potentially, we could see a world where there's a winner's curse with the one that ends up investing the most.

Well, I will tell Cory Bridges that he's in fine company with his winner's

I'm sure he'd appreciate that.

Yeah, I think he could afford that. Bridget Thaler's new book he co authored is called the Winner's Behavioural Economics Anomalies, Then and Now. This episode was produced by Julia Ritchie with engineering by Robert Rodriguez. It was fact checked by Sarah Juarez. Cait Concannon edits the show and the indicator is a production of npr.