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The Winner’s Curse

Greg Spears

I RECENTLY LEFT A BID for a set of old, dusty chairs at a country auction. The next morning when I called the auctioneer, he told me I was the high bidder and the chairs’ new owner. As an economist, I immediately thought, “Wait—am I the winner or the loser here?”

The auction was held at the Elks Lodge in Rockland, Maine, where old furniture tends to go for a song. I had been drawn there by a picture of six Chippendale dining chairs supposedly made in Philadelphia in the 18th century. Considered the apex of American furniture design, originals are hard to find and ridiculously expensive on eBay.

When I looked the chairs over before the auction, I noticed through tenons, which do indeed indicate a Philadelphia origin. The side rails of the seats are slotted completely through the rear legs, which makes these chairs as sturdy as “wooden tanks,” according to one furniture expert. These particular chairs were plainer than the fancy examples you’ll find in museums, with shell carvings and claw feet. They may have been made for Quakers, who generally wanted the best quality but without any ostentation.

The chair seats were high and comfortable. People were much smaller then, so this is rare in an old chair. I was considering a bid but one thing held me back—the winner’s curse. That’s the title of a well-known economic study that found that winners at an auction usually pay too much.

The winner’s curse works this way: There’s a rational, objective value to any good, but opinions of worth will differ even among experts. Some will value a good too low and others too high. At an auction where there are several bidders, the expert with the high estimate will win and tend to overpay.

The winner’s curse was first observed with off-shore oil leases in the Gulf of Mexico, where winning firms paid millions more for drilling rights than the value of the energy subsequently recovered. The curse is still very much alive today. You can see it in takeover battles for billion-dollar companies and in the bidding war for the 1960s split-level down the street.

My biggest risk in bidding for the six chairs: They turned out to be reproductions. I needed to turn furniture detective. I’ll spare you all the details except for this telling clue: The wood underneath the seats was roughhewn and gouged. Old-time chair joiners were busy men who didn’t waste time finishing the parts that didn’t show. The inside wood on reproductions is usually as smooth as silk.

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Seeing me turn over a chair, the auctioneer called me over to show me an appraisal given to him by the current owners. The letter stated that the chairs were made in Philadelphia around 1775. The appraiser had valued the set at $7,500 in 1984. I decided to bid.

In economics, if you want to avoid the winner’s curse, you’re advised to bid lower than your first instinct. The auctioneer’s estimate was the chairs would sell for between $2,000 and $3,000. Last summer, I paid around $225 apiece for new plastic Adirondack chairs. They’d come flat-packed and I’d assembled them myself—with a few choice words. I decided I should be willing to bid a little more for chairs made of solid mahogany than I’d paid for the plastic jobs from Costco.

I couldn’t attend the auction in person, and it wasn’t online. That meant I had to leave one bid—the highest price I was willing to pay. I left a bid of $1,400 for the set. Any check I write with a comma in it causes me anxiety, and this was as big a bid as I’d ever made—aside from bidding on a house. With sales tax and the auctioneer’s 15% commission tacked on, each chair ended up costing me $283.

The next morning, after I brought them home, I wiped them down outside. In the bright sunlight, I noticed for the first time that the chairs’ legs had been lengthened sometime after they were made, which is why they sat so satisfyingly high. That meant I didn’t have an Antiques Roadshow discovery on my hands. Top collectors want things as unchanged as possible.

Did I overpay? It’s a possibility. Canny Maine antique dealers attend all these auctions and will snap up bargains. The fact that I won suggests that I paid at least fair value—for a Maine country auction. Did I mention the seats could do with a recovering? I could feel the tingle of buyer’s remorse in my gut.

Fortunately, just then my wife got home and said she loved the chairs’ mellow old glow and beautifully carved crest rails. That’s the most important test of value in our household. We’ll take them home to Pennsylvania and use them in our dining room, just as was intended when they were built some 250 years ago—for Ben Franklin, no doubt.

Greg Spears is HumbleDollar’s deputy editor. Earlier in his career, he worked as a reporter for the Knight Ridder Washington Bureau and Kiplinger’s Personal Finance magazine. After leaving journalism, Greg spent 23 years as a senior editor at Vanguard Group on the 401(k) side, where he implored people to save more for retirement. He currently teaches behavioral economics at St. Joseph’s University in Philadelphia as an adjunct professor. The subject helps shed light on why so many Americans save less than they might. Greg is also a Certified Financial Planner certificate holder. Check out his earlier articles.

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Phil Scott
Phil Scott
13 days ago

Our local food bank holds regular auctions of items from local merchants supporting the cause! I put in min/entry bid on 1 yr’s trash pickup with the local carting co. Forgot about it until 6 days later I got an email telling me I’d won. Surprised, I checked and realized I’d bought 52 weeks of trash pickup for what I’d normally pay for 13 weeks. OTH- I missed the 4 new name brand tires (with mounting and balancing) that went for $340…. I’d have paid $360; even $380. Next time I’ll pay attention to the auction closing time!

MikeinLACA
MikeinLACA
13 days ago

The winner’s curse = the lucky family that paid the high price for the home on my block = my new comp! Thanks, neighbor.

Kevin Thompson
Kevin Thompson
14 days ago

The Humble Dollar never disappoints with its authenticity and wonderful stories. Glad I am a member.

Derek R. Austin
Derek R. Austin
14 days ago

Any check I write gives me anxiety, since it’s 2022, and I haven’t owned a checkbook in at least 5 years…

Donny Hrubes
Donny Hrubes
14 days ago

I still have several ck bks and use them as doing that gives a sense of what is being spent sort of like the cash I also use.

Steven Reynard
Steven Reynard
14 days ago

There’s a rational, objective value to any good, but opinions of worth will differ even among experts. Some will value a good too low and others too high.”

That sounds just like what most economists would say and is absurd. Opinions of worth are just that opinions, even by experts. Unless they lay their money down, an expert’s opinion has even lower “value” than your own. The value has to be subjective to each individual. The chairs were either worth more to you than $1,4000 or they weren’t. The value is what someone was willing to pay, ex post facto.

Fortunately, just then my wife got home and said she loved the chairs’ mellow old glow and beautifully carved crest rails. That’s the most important test of value in our household.”

Exactly correct. If you and your wife hated them you may have taken out to the curb for free recycling regardless of what you had paid. Regardless of an expert’s opinion, they could have held no value to you.

A consumer product is completely different from a product used for production. An oil field lease could be valued by the profits the oil extraction could generate. The value may be higher for a more efficient company than for one less efficient as they could generate more profit from it. If we really do switch from fossil fuels, that oil, and those leases, would have little or no value as well.

That doesn’t mean that people don’t make mistakes in value. Everyone makes mistakes. If the chair color clashes with your table, you may suddenly value them substantially less. If the oil output or demand isn’t as predicted, a company may regret spending so much. That regret may have evaporated with current gas prices…

Greg Spears
Greg Spears
14 days ago
Reply to  Steven Reynard

The Atlantic Richfield engineers who named the Winner’s Curse in 1971 did evaluate oil leases in the Gulf of Mexico–which are sold at auction–and found they returned far less than expected. Indeed companies they found the firms would have enjoyed higher returns by investing their funds in a credit union. Their advice is to bid low, especially when three or more bidders are present.

SanLouisKid
SanLouisKid
14 days ago

In the book The Millionaire Next Door they mention auctioneers as being a profession that produces a fair percentage of millionaires. While the authors didn’t say this, I have a feeling that watching a large “flow” of items being sold gives you a better feel for what is actually worth the money.

Steven Reynard
Steven Reynard
14 days ago
Reply to  SanLouisKid

An auctioneer is in the business of connecting someone that values a product low with someone that values it high, for a fee. That’s usually a pretty good business model, especially if they don’t have to buy the products themselves and assuming the risk being wrong. Similar to realtors, which unfortunately often have the problem of strong local competition.

wtfwjtd
wtfwjtd
14 days ago

Greg, I enjoyed your take on this subject. It reminds me of when, back in the day, me and my late father used to go to gun shows, flea markets, and other venues in search of “bargains” for our various collections. We rarely found the real bargains, but we had a great time looking over the stuff and discussing life in general. The two of us together made a pretty good team, and kept each other from paying too much for stuff. It was always great fun! Thanks again for the reminder.

Guest
Guest
14 days ago

I’ve been to that lodge for auctions before! They’re really good fun. In the past I’ve bought furniture at various auctions and while I may have overpaid a bit, I didn’t care. The chairs and tables have a ton of character for our old New England home and were about the same prices as new ones. I love our Shaker pieces and don’t care if we get our money back. We enjoy looking at them and their unique style.

alpha omega
alpha omega
14 days ago

Droll piece! Reminds me of the hours my Mum spent in Chor Bazaar, Bombay, hunting for antiques. Our home had a chandelier from an unknown period of the British Raj, ornate carvings allegedly from old Hindu. homes,which she knew were fake but bought for their beauty. Chor Bazaar, which is Hindi for thieves’ market, was a hunting ground for genuinely stolen goods, genuine and fake antiques and an offloading station for stuff from the mansions of dead rich merchants.

Purple Rain
Purple Rain
14 days ago
Reply to  alpha omega

“Chor” in Chor Bazaar as you probably know, stands for “thief” in Hindi. Initially it was where stolen goods landed. Now it is where people go to treasure hunt.

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