Jan 20, 2009

The winner's curse

This can occur in an auction where the bidders have incomplete information about the true value of the item they're bidding on. If the average of all the bids equals the item's true value, then whoever wins the bid must have overpaid for it, since their bid was the highest, and therefore above average. So the tendency is for the winning bidder to be the bidder with the highest misestimate of value.

Unrelated: In honor of the inauguration, here's some presidential trivia - who was the only U.S. president to successfully pay off the national debt? Andrew Jackson, in 1835. Unfortunately, the panic of 1837 (brought on by massive banking failures) and subsequent depression put an end to that, as the national debt increased ten times in the first year of the depression.

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