Gilbert Auction: The Winner's Curse

For those of us who work in the Gilbert auction industry

, it is a familiar and comfortable world. However, the auction industry is but a fairly tiny corner of the wider world of business. To business people from other industries, auctions are an odd way of doing business that has very unique rules and customs. The viewpoints of business people outside of our industry can give us new insights into our traditional ways of doing business.

One example of an interesting outside viewpoint is the idea of the "winner's curse". The winner's curse is a theory advocated by Paul Klemperer, an economics professor at Oxford University who is specializes in Auction Economics. The theory states that when an item is auctioned, a large percentage of bidders are initially interested in buying at the starting bid. As the bidding continues, there are fewer and fewer people interested in making the purchase. Bidders drop out when the level of bidding exceeds their perceived value of the item. The last bidder is the person with the highest valuation of the item.

If a bidder has an inflated idea of the actual value of an item, they will be the last person bidding and pay too much. The theory says that every winning bidder is the person who knew the least about the value of an item and therefore always pays too much. Paying too much for an item purchased at Gilbert auction is the winners curse and Paul Klemperer believes it is an all-pervasive aspect of Gilbert auctions.

Paul Klemperer's idea of the winner's curse takes an overly negative view of auctions, but it does correctly identify one key element of the Gilbert auction process. That is the fact that auctions severely punish those who bid without being knowledgeable. In a fixed-price (retail) environment a lack of knowledge does not result in paying a higher price. But conversely, in a fixed-price environment, having a lot of knowledge does not result in paying a lower price. The ignorant and the expert pay the same price. But if Gilbert auctions punish those who lack knowledge, they also handsomely reward those who do have knowledge.

For example, what if everyone has too low a perception of the value of an item? This means that all of the bidders will make the mistake of dropping out too early rather than too late. Where general perceptions of an item's value are too low, knowledge of an item's real worth can result in the purchase at a fraction of its real value. Purchasing an item for a small fraction of its real value results in what I call the "winner's blessing".

Anyone who has spent time in the Gilbert auction industry has seen many examples of winner's blessing. These are auctioneers' favorite stories. At one of our Gilbert auctions we sold a large and rather unattractive ingot of metal. The bidding started at $2.50 and ended at $15.00. The winning bidder had once worked in the mining industry and, unlike the other bidders, knew he was bidding on an ingot of 80% pure silver. He sold his purchase several days later for 100 times what he paid for it. While this level of profit from individual knowledge is unusual, it is exceedingly common for Gilbert auction bidders to resell their purchases for 10 times what they initially paid.

I think most auctioneers' experience with Gilbert auctions is that the range of prices for items forms a bell-shaped curve. A few items sell for far less than what they are worth, a few sell for far more than what they are worth, and most sell for pretty close to their real value. These means that at any given auction a few people will suffer from winner's curse, a few from winner's blessing and most will just be the winning bidder. If the winner's curse was really all that prevalent at auctions, and most purchasers resulted in suffering from it, I cannot believe that Gilbert auctions would continue to grow in popularity - making them an auctioneer's blessing.

by: Deb Weidenhamer

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