Economics Game Theory In Behavioral Economics Questions
The winner's curse is a concept in auction theory that refers to the situation where the winner of an auction ends up paying more for the item than its actual value. This occurs when bidders overestimate the value of the item and engage in aggressive bidding to secure the win. As a result, the winner may experience regret or a feeling of being "cursed" because they paid more than what the item is worth.
The impact of the winner's curse on bidding behavior is that it can lead to irrational and inflated bids. Bidders may engage in a bidding war, driven by the fear of losing out on the item, which can drive up the price beyond its true value. This behavior is influenced by the desire to win and the tendency to overestimate the value of the item, leading to suboptimal outcomes for the winner and potentially distorting the market.