In the 1980s Richard Thaler, now a Nobel laureate, challenged the tidy economic model of humans as perfectly rational, self-interested calculators. He helped found behavioral economics by showing how real people systematically deviate from those assumptions. One of the anomalies he highlighted was the “winner’s curse” — the idea that winners of auctions and competitive bidding often overpay and end up worse off.
The winner’s curse shows up whenever people competitively bid for something with uncertain value: classic auctions for art or antiques, bidding wars for houses, company acquisitions, sports drafts, and even advances for book deals. In a perfectly rational world, the winner simply values the item most. In practice, the winner is the outlier who may have overestimated the value — everyone else’s lower bids suggest caution that the winner ignored.
The phenomenon was apparently first noticed by oil companies. When many firms bid on drilling rights, the plots they won tended to have less oil than expected. It wasn’t faulty geology but bidding strategies: the highest bidder had been overly optimistic. Other researchers have found similar patterns across domains. Publishers’ auctioned books often fail to earn out advances. Studies of free-agent signings in Major League Baseball and corporate acquisitions show buyers frequently overpay. Richard Roll described a “hubris hypothesis” in which overconfident executives pay too much for takeover targets. Thaler and colleagues found top NFL draft picks often underperform expectations — teams reach for perceived stars and overvalue them (remember Tom Brady at pick 199).
How to avoid the winner’s curse? Thaler’s simple, practical advice is to ask before you bid: if I win, will I be happy? That is, consider whether your winning price still leaves the purchase a good deal given the uncertainty. Be particularly cautious in auctions with many bidders; a large field increases the chance the winner simply overestimated value. The more bidders there are, the more conservatively you should bid.
Thaler compiled his “Anomalies” columns into a book titled The Winner’s Curse; a new, revised edition with Alex Imas updates evidence and examines how findings have held up. The book and its revisions underline that these effects are robust across many settings. The takeaway is practical: recognize that competitive bidding can bias you toward overpaying, adjust your valuation accordingly, and set a clear threshold for when winning is truly desirable.
