National transactions volume, while not having regained 2007 levels, has increased more than four times since the 2009 trough. How can investors avoid the winner’s curse during this headlong rush to buy assets?
The winner’s curse states that the optimal property bidding strategy entails bidding a substantial amount below your assumed property value. The idea is that if you do not bid under your assumed value, your uncertainty about the actual value of the property will often lead you to win bids for properties on which you, after paying your high bid, lose money. In other words, the winning and highest bidder pays too much.
The incidence of the winner’s curse is a direct consequence of the number of auction bidders. Asset value uncertainty exacerbates the severity of the winner’s curse. Auction participants fail to adapt their bidding strategy to the degree of competition; behavior is suboptimal.
A cognitive illusion causes investors to make sys