Winner's Curse

A spell Hermione invented in J.K. Rowling’s Harry Potter and the IPO.

Eh, okay. The winner’s curse is where the winning bid in an auction wins—obviously—but also loses, because they probably paid a higher price than the thing they won is worth.

In fancy terms, the winning bid has a tendency to be larger than the intrinsic value of the thing won.

Are you wondering, "why would that ever happen; shouldn't markets be handling that?" Well, then you’ve obviously never been in a bidding situation. Emotions are high. Egos are out in the open. Rationality takes a back seat.

One could argue that perhaps there is a non-market value included sometimes that makes up the difference between the winning bid price and the intrinsic value of the thing. For instance, that giddy feeling that you beat all of those other people around you. It’s like winning the Super Bowl all by yourself. That’s a lot of endorphins.

This can also happen in larger, less-traditional circumstances, in which buyers have incomplete information re: what they’re buying. For instance, IPOs come with some amount of risk, since nobody knows if those companies will be Apple-Google-big, or if they’ll wither away within a couple of years. The original term “winner’s curse” came from bidding for offshore oil drilling rights in the Gulf of Mexico years ago. In that case, if you want to win, you may have to pay a price and overbid in order to win. That’s the price you pay for not letting your competition get what’s yours.