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.

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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