Winner's Curse and stock buying
A few days ago I got a review on auction theory and winner's curse in my sports economics class. Here is the basic idea.
Many cities compete for the right to host a unique event, such as the Super bowl or the Olympics, that they would eventually pay a price much much higher than value the event would bring because of intense bidding. The NFL and IOC would also institute different rules to encourage higher bidding prices, such as multiple rounds and limited quantity (Super bowl is an annual event and Olympics is a quad-nual event). Even though there is an honor attached to winning the bid, the player pays a price higher than the event's value, which is called "winner's curse."
"winner's curse" does occur often. Remember how much you agonized over over-bidding a product on ebay. and remember how much you wished you lost that bid...
The logical solution to winners' curse is to determine the value of product before entering the bidding war. You are only going to bid for the value of the product minus the shipping cost. If the price goes out of hand, you drop out of the competition. Be aware, there are still a lot of fish in the water, especially ebay normally has multiple bids on the same product at the same time.
Onto stock investing. Warren Buffett, or Ben Graham, once said, "price is what you pay, and value is what you get." The stock market is an auction house that allows the players to bid forever. Without establishing a value for the company, players are easily affected by the frenzy winning brings. "Yay, I bought this stock at price (insert number), I was so afraid it would go even higher." only to realize later, "shit, I bought it because my buddy told me to, I actually didn't know how much it is worth. and shit the price is tanking."
Be aware of winner's curse next time you buy. There are still a lot of fish in the water.
posted by An Intelligent Investor Wannabe @ 1:26 PM
2 Comments
2 Comments:
You have an acceptable logic. Yet each person chooses sets their own value to anything. Take for instance what you said about the Olympics. Some people might have a relative competing in the event so to them the value of attending such an event is higher than to someone who just wants to see it because they have the money.
When a person has no clue as to what they are bidding on, then they are essentially gambling.
The simple way to avoid winner's curse, like you say, is to figure out the fair value of what you're buying. The problem in the market is that there are so many ways you can do that, from comparables, to discounted cash flows, and even just valuation multiples. And what's a fair value to someone else might not be a fair value for you.
Post a Comment
Subscribe to Post Comments [Atom]
<< Home