Overcoming the winner's curse: An adaptive learning perspective

Yoella Bereby-Meyer, Brit Grosskopf

Research output: Contribution to journalArticlepeer-review

15 Scopus citations

Abstract

The winner's curse phenomenon refers to the fact that the winner in a common value auction, in order to actually win the auction, is likely to have overestimated the item's value and consequently is likely to gain less than expected and may even lose (i.e., it is said to be "cursed"). Past research, using the "Acquiring a company" task has shown that people do not overcome this bias even after they receive extensive feedback. We suggest that the persistence of the winner's curse is due to a combination of two factors: variability in the environment that leads to ambiguous feedback (i.e., choices and outcomes are only partially correlated) and the tendency of decision makers to learn adaptively. We show in an experiment that by reducing the variance in the feedback, performance can be significantly improved.

Original languageEnglish
Pages (from-to)15-27
Number of pages13
JournalJournal of Behavioral Decision Making
Volume21
Issue number1
DOIs
StatePublished - 1 Jan 2008

Keywords

  • Adaptive learning
  • Asymmetric information
  • Variance in feedback
  • Winner's curse

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