<p>In both popular level books on economics/rationality/etc., and videos of actual economics lectures, I keep running into the suggestion to bid in a common value auction as though victory is already guaranteed.  For example, from <a href="https://oyc.yale.edu/economics/econ-159/lecture-24" rel="nofollow noreferrer">this Yale lecture</a>...</p>
<blockquote>
<p>So the lesson here is, bid as if you know you win.  Now why is that a
good idea? Let’s go back to this case of now you discover you’ve won.
Provided you bid as if you know you won, when you win you’re not going
to be disappointed because you already took that information into
account. But if you bid not as if you won, you failed to take into
account the possibility of winning, then winning’s going to come as a
shock to you and cause regret. So the only way to prevent this ex-post
regret, the only way to bid optimally, is to bid as if you know you’re
going to win. Estimate the number of coins not on your own sample but
on the belief that your sample is the biggest sample.</p>
</blockquote>
<p>This makes very little sense in my mind.  I understand why the winner's curse emerges from naive bidding, but the prescription for countering it seems silly.  If I condition my bid on the knowledge that I'm certainly going to win, then my bid will be the second lowest bid possible (in other words, the lowest bid that could actually be a winning bid).  If I am restricting my view of what outcomes may occur to the possible worlds where I win the auction, then my optimal bidding strategy would be to select one of those worlds in which I pay the lowest cost for the item.  On the other hand, if I do not allow my strategy to vary in response to the stipulated information that victory is guaranteed, then I will end up bidding as though I do not know of the winner's curse construct.</p>
<p>What is going wrong in my thinking about this prescription?</p>

CC BY-SA 4.0
2022-12-04T21:34:10.817Z
It does not say that you should behave as if you are "certainly going to win".
Michael Greinecker
CC BY-SA 4.0
2022-12-05T03:06:28.390Z
@MichaelGreinecker The quote says, for example, "bid as if you know you win," "bid as if you know you won," and "bid as if you know you're going to win."  I don't see in what way this differs from bidding as if you are certainly going to win.
user10478
CC BY-SA 4.0
2022-12-05T07:32:58.043Z
The quote tells you that you should bid in a way that is optimal conditional on winning; you should bid so that your bid would be still optimal if you would know it is the winning bid.
Michael Greinecker
CC BY-SA 4.0
2022-12-06T06:02:09.150Z
@MichaelGreinecker In my mind, the bid that is optimal conditional on winning is the same as the smallest bid that could possibly win.  What is the difference?
user10478
CC BY-SA 4.0
2022-12-06T09:55:32.530Z
If you win with a very low bid, it must be that everyone else made a higher bid and this is the information you should take into account. It does not mean that the event that your bid is the winning bid is guaranteed irrespective of everyone else's behavior.
Michael Greinecker
CC BY-SA 4.0
2022-12-06T16:27:04.983Z
@MichaelGreinecker At the risk of sounding difficult or obtuse, isn't "if you win with a very low bid, it must be that everyone else made a higher bid" just a straight up contradiction?
user10478
CC BY-SA 4.0
2022-12-06T17:27:10.960Z
You are right, it should be a lower bid by the others. I get confused from hearing too much about procurement auctions...
Michael Greinecker
CC BY-SA 4.0
2023-03-12T01:46:06.660Z
There are several versions of common value auctions. To get a better feel of the right direction of solving winner's curse it might be better to start with 'Wilson's drainage tract problem' (taken from Milgrom's auction theory book). Here only one player receives a signal forcing all others to play only mixed strategies.
Dayne
<game-theory><auctions><asymmetric-information><information>
Understanding How to Counter the Winner's Curse
user10478
# Understanding How to Counter the Winner's Curse

(Asked by: username_0 on 2022-12-04)

In both popular level books on economics/rationality/etc., and videos of actual economics lectures, I keep running into the suggestion to bid in a common value auction as though victory is already guaranteed. For example, from [this Yale lecture](https://oyc.yale.edu/economics/econ-159/lecture-24)...

> So the lesson here is, bid as if you know you win. Now why is that a
> good idea? Let’s go back to this case of now you discover you’ve won.
> Provided you bid as if you know you won, when you win you’re not going
> to be disappointed because you already took that information into
> account. But if you bid not as if you won, you failed to take into
> account the possibility of winning, then winning’s going to come as a
> shock to you and cause regret. So the only way to prevent this ex-post
> regret, the only way to bid optimally, is to bid as if you know you’re
> going to win. Estimate the number of coins not on your own sample but
> on the belief that your sample is the biggest sample.

This makes very little sense in my mind. I understand why the winner's curse emerges from naive bidding, but the prescription for countering it seems silly. If I condition my bid on the knowledge that I'm certainly going to win, then my bid will be the second lowest bid possible (in other words, the lowest bid that could actually be a winning bid). If I am restricting my view of what outcomes may occur to the possible worlds where I win the auction, then my optimal bidding strategy would be to select one of those worlds in which I pay the lowest cost for the item. On the other hand, if I do not allow my strategy to vary in response to the stipulated information that victory is guaranteed, then I will end up bidding as though I do not know of the winner's curse construct.

What is going wrong in my thinking about this prescription?

**Tags:** game-theory, auctions, asymmetric-information, information
> **Comments:**
> **username_1**: It does not say that you should behave as if you are "certainly going to win".  
> **username_0**: @MichaelGreinecker The quote says, for example, "bid as if you know you win," "bid as if you know you won," and "bid as if you know you're going to win."  I don't see in what way this differs from bidding as if you are certainly going to win.  
> **username_1**: The quote tells you that you should bid in a way that is optimal conditional on winning; you should bid so that your bid would be still optimal if you would know it is the winning bid.  
> **username_0**: @MichaelGreinecker In my mind, the bid that is optimal conditional on winning is the same as the smallest bid that could possibly win.  What is the difference?  
> **username_1**: If you win with a very low bid, it must be that everyone else made a higher bid and this is the information you should take into account. It does not mean that the event that your bid is the winning bid is guaranteed irrespective of everyone else's behavior.  
> **username_0**: @MichaelGreinecker At the risk of sounding difficult or obtuse, isn't "if you win with a very low bid, it must be that everyone else made a higher bid" just a straight up contradiction?  
> **username_1**: You are right, it should be a lower bid by the others. I get confused from hearing too much about procurement auctions...  
> **username_2**: There are several versions of common value auctions. To get a better feel of the right direction of solving winner's curse it might be better to start with 'Wilson's drainage tract problem' (taken from Milgrom's auction theory book). Here only one player receives a signal forcing all others to play only mixed strategies.  

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## 0 answers

