The winner’s curse suggests that the winner of an auction often turns out to be the loser. When we bid on something for winning it then over some time, we start buying things at a sky-high value and that will end up as losers.
Business – when businesses adopt heard behavior and they see other businesses start acquiring businesses. So, they also involve buying businesses at a higher price to win the competition. Businesses win other businesses for time being but due to the higher price paid by them, this bid will result in a troublesome situation in the longer term. We have seen lots of high-priced acquisitions made by businesses that turn out to be trouble creating for the core business.
Investment – IPOs, mergers, and acquisitions are part of the winner’s curse. As they offer the part to them who bid higher. So that winner gets stake of the company but the majority of the time, winner get it at a higher price and that ultimately losing things. During the regular buying of stocks, we have many buyers who wanted to buy a stock. So, one put a higher bid compared to others for buying it first so the last bidder comes as a loser. The current scenario is similar to the winner’s curse, with many high-priced IPOs floating to the bourse and people chasing it heavily. We don’t that many of those will survive in the future or not. And if survive then what will be the return going forward.
As Mr. Buffett has advised that we should not go for auction. If we have to go for it then first decide the maximum value then deduct 20% from it and do not bid a single penny on that deducted 20% amount.
This entire series will be reviewed with various examples from books which are “Thinking, Fast and Slow” and “The Art of Thinking Clearly“.