L5. The Winner’s Curse and Auction Behavior
Section outline
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Consider Rick, who found a rare coin listed on an online auction website. The auction is to last two weeks. Rick is very familiar with coin collecting and has a very good idea of the coin’s value. He places a bid based upon the value he believes the coin holds when he discovers the auction, and is satisfied because his bid is the highest thus far. He then waits, checking the auction site daily to see if his bid is still the top. One day before the auction is to close, he notices that someone has outbid him by at least $10. Rick quickly responds by upping his bid by $20, only to discover that he is still being outbid. Thus he follows up with another increase of $30, obtaining the top bid and winning the coin. Rick is very satisfied to have won the auction, and he doesn’t seem to be bothered by paying almost $50 more for the coin than he thought it was worth.
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