What is the winner's curse in simple terms?

When many people compete to buy something whose value is uncertain, the highest bidder wins, so the winner has likely paid too much.

Do experts fall prey to it?

It appears clearly among inexperienced lab participants, but some studies find that experienced professional bidders, as in real oil lease auctions, shade their bids and largely avoid it.

Winner's Curse

📈 Economics By CampusDown Wiki Editorial Team Last updated October 27, 2026

The winner's curse is a phenomenon named by Atlantic Richfield engineers Capen, Clapp and Campbell in a 1971 analysis of offshore oil lease auctions: when an item has the same but uncertain value to all bidders, the bidder with the most optimistic estimate wins, so the winner tends to pay more than the item is worth or earn less than expected.

Contents

1. Origin and logic
2. Experimental and field evidence
3. Applications and behavioral models
4. FAQ
5. References

Origin and logic

Capen, Clapp and Campbell (1971) observed that returns on Gulf of Mexico offshore leases won by oil companies in the 1950s and 1960s fell well short of expectations. For a common value item such as an oil reserve, whose value is the same for everyone but which each bidder can only estimate, individual estimates may be accurate on average, yet because the highest estimate wins, the winner's estimate is systematically too high. Winning is itself bad news that one overestimated the value. Wilson (1969) first modeled auctions with this information structure, and Milgrom and Weber (1982) showed that rational bidders should shade their bids by computing expected value conditional on winning. The curse can be seen as a form of adverse selection.

Experimental and field evidence

Bazerman and Samuelson (1983) reported that in classroom auctions of jars of coins, winning bids averaged well above the true value. In controlled experiments, Kagel and Levin (1986) found that inexperienced bidders repeatedly lost money and tended to bid more aggressively as the number of bidders grew. Samuelson and Bazerman (1985) showed the same error in a corporate acquisition negotiation task. In contrast, Hendricks, Porter and Boudreau (1987), analyzing actual offshore lease auction data, reported that professional bidders largely avoided the curse. Thaler (1988) and Kagel and Levin (2002) synthesized this evidence.

Applications and behavioral models

Roll (1986) proposed the hubris hypothesis of takeovers, in which acquirers overvalue targets and overpay premiums, linking the winner's curse to overconfidence. Massey and Thaler (2013) documented a loser's curse in the NFL draft, where top picks are worth less than their cost. Theoretically, Eyster and Rabin (2005) proposed cursed equilibrium, in which players fail to fully infer the information contained in other bidders' behavior. Klemperer (2004) discussed the importance of mitigating the winner's curse in the design of spectrum auctions.

FAQ

What is the winner's curse in simple terms?: When many people compete to buy something whose value is uncertain, the highest bidder wins, so the winner has likely paid too much.
Do experts fall prey to it?: It appears clearly among inexperienced lab participants, but some studies find that experienced professional bidders, as in real oil lease auctions, shade their bids and largely avoid it.

Sources reviewed: 2026-10-26

References

Capen, E. C., Clapp, R. V., & Campbell, W. M. (1971). Competitive bidding in high-risk situations. Journal of Petroleum Technology, 23(6), 641–653.
Wilson, R. B. (1969). Competitive bidding with disparate information. Management Science, 15(7), 446–448.
Milgrom, P. R., & Weber, R. J. (1982). A theory of auctions and competitive bidding. Econometrica, 50(5), 1089–1122.
Bazerman, M. H., & Samuelson, W. F. (1983). I won the auction but don't want the prize. Journal of Conflict Resolution, 27(4), 618–634.
Kagel, J. H., & Levin, D. (1986). The winner's curse and public information in common value auctions. American Economic Review, 76(5), 894–920.
Roll, R. (1986). The hubris hypothesis of corporate takeovers. Journal of Business, 59(2), 197–216.
Thaler, R. H. (1988). Anomalies: The winner's curse. Journal of Economic Perspectives, 2(1), 191–202.
Samuelson, W. F., & Bazerman, M. H. (1985). The winner's curse in bilateral negotiations. In V. L. Smith (Ed.), Research in Experimental Economics (Vol. 3, pp. 105–137). Greenwich, CT: JAI Press.
Hendricks, K., Porter, R. H., & Boudreau, B. (1987). Information, returns, and bidding behavior in OCS auctions: 1954–1969. Journal of Industrial Economics, 35(4), 517–542.
Kagel, J. H., & Levin, D. (2002). Common Value Auctions and the Winner's Curse. Princeton, NJ: Princeton University Press.
Eyster, E., & Rabin, M. (2005). Cursed equilibrium. Econometrica, 73(5), 1623–1672.
Massey, C., & Thaler, R. H. (2013). The loser's curse: Decision making and market efficiency in the National Football League draft. Management Science, 59(7), 1479–1495.
Klemperer, P. (2004). Auctions: Theory and Practice. Princeton, NJ: Princeton University Press.

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This article was last updated on October 27, 2026. It is based on widely recognized original works and textbooks; when citing it in a paper, please check the original sources listed in the references.