Mystery Auction

This article is an excellent discussion on auctions. http://www.beyonddiscovery.org/content/view.page.asp?I=3687

In particular, it discusses a scenario in which a jar of nickels is placed up for bid. The jar of nickels goes to the highest bidder. As we know from wisdom of the crowd, the collection of people will guess nearly correctly. However, because it is the highest bidder that wins the jar of nickels, it is almost inevitable that the person who wins will have lost money. This is due to their overestimation of the value of the item. Very interesting, it applies to many situations including baseball players being bid over by teams and oil being bid by drilling companies. It almost would make sense for an oil company in possession a field of oil to place it up for auction rather than drill it.

I agree that this was an interesting article. It is similar to the idea discussed in class with the Lemons used car example, where the seller knows the value of the item being auctioned, but the bidder does not... This incomplete information always leaves more power with the seller than with the buyer.

"To protect themselves from the winner’s curse bidders must follow an odd logic. In any auction presumably some people will overestimate the value of the item. If everyone bids what they think the item is worth, the person with the highest overestimate will win and pay too much for the item. So the safe strategy for each bidder is to assume she has overestimated, and lower her bid somewhat. If she really has overestimated, this strategy will bring her bid more in line with the actual value of the item. If she has not really overestimated, lowering her bid may hurt her chances of winning the auction; but it’s worth taking this risk to avoid the winner’s curse. "

This article is a very good commentary on how people will bid during auctions where they don't know the actual value of the item.

This is put in a good perspective. With incomplete information, crowds can easily make bad decisions. If you must underestimate your bid, wouldn't it be difficult to win an auction, assuming that not everyone will know to underestimate their bid? Wouldn't this only result in the person overestimating winning? To me, this assumption makes auctions difficult to win and that you can only win if you overestimate the value.