Victor's Curse
What Is the Winner's Curse?
The champ's curse is a propensity for the triumphant bid in a auction to surpass the intrinsic value or true worth of a thing. The gap in auctioned versus intrinsic value can commonly be credited to deficient data, feelings, or different other subjective factors that might impact bidders.
As a rule, subjective factors typically make a value gap on the grounds that the bidder faces a troublesome time determining and rationalizing a thing's true intrinsic value. Subsequently, the biggest misjudgment of a thing's value winds up winning the auction.
Grasping the Winner's Curse
The term victor's curse was authored by three Atlantic Richfield engineers, who noticed the poor investment returns of companies bidding for offshore oil drilling rights in the Gulf of Mexico. In the investing world, the term frequently applies to [initial public offerings](/initial public offering) (IPOs). Exhaustively, the victor's curse theory can be applied to any purchase done through auction.
As most investors know, intrinsic value is typically quantifiable yet circumstances and subjective factors make value gauges more muddled in real-time and real life. Hypothetically, on the off chance that perfect data was accessible to everybody and all participants were totally rational in their choices and skilled at valuation, a completely efficient market would exist and no excessive charges or arbitrage opportunities could at any point happen.
Nonetheless, while efficient markets are useful to grasp in theory, generally they have proved to be impossible 100% of the time. In this way, feelings, irrationalities, bits of hearsay, and other subjective factors can push prices a long ways past their true values.
The champ's curse, at its core, is a combination of cognitive and emotional friction and is normally recognized sometime later. The buyer is triumphant in possessing whatever asset they are bidding on. Notwithstanding, the asset is reasonable worth undeniably less in resale value after ownership due to various factors influencing the purchase and impacting its value from now on.
The victor's curse can lead to an illustration of buyer's regret, wherein the buyer of something feels like they've overpaid everything considered.
Overall, when an individual needs to bid more than another person to get something, there is a decent chance they wind up paying more than they had wished. Sadly, it's frequently solely after the transaction has occurred that they see this.
An Example of the Winner's Curse
Jim's Oil, Joe's Exploration, and Frank's Drilling are seeking drilling rights for a specific area. How about we guess that, subsequent to accounting for all drilling-related costs and potential future revenues, the drilling rights have an intrinsic value of $4 million. Presently how about we envision that Jim's Oil bids $2 million for the rights, Joe's Exploration $5 million, and Frank's Drilling $7 million.
While Frank's won the auction, it ended up overpaying by $3 million. Even on the off chance that Joe's Exploration is 100% certain that this price is too high, it can fail to address it, as the highest bid generally wins the auction, regardless of how overpriced the bid might be.
Highlights
- In the investing world, the term frequently applies to initial public offerings (IPOs) however thoroughly a victor's curse can occur in any market where auctions happen.
- The gap in auctioned versus intrinsic value can commonly be credited to deficient data, types of bidders, feelings, or different other subjective factors.
- Initially, the term champ's curse was begat because of companies bidding for offshore oil drilling rights in the Gulf of Mexico.
- The champ's curse is a propensity for the triumphant bid in an auction to surpass the intrinsic value or true worth of a thing.
- The gap among intrinsic and auction value will generally be affected by the bidders in question.
