CHAPTER 56Why Do I Pay Too Much on eBay?
In 2018, eBay had 168 million active buyers. Most people are elated when their bid wins the item they covet. Fans of professional sports teams are thrilled when their team signs a top free agent. Oil companies are happy when their high bid gives them rights to an offshore oil lease. Being a pessimist by nature, this chapter is devoted to explaining to you why the winning bid often exceeds the value of what the bidder obtains. Nobel Prize winner Richard Thaler has written the definitive survey article (“Anomalies: The Winner's Curse,” The Journal of Economic Perspectives, vol. 2, no. 1, Winter 1988, pages 191–202) on the winner's curse.
To gain some intuition for the winner's curse, assume there is a painting that has a true value of $100,000. Suppose five people are going to bid on the painting and on average (see Chapter 33, “Can Prediction Markets Predict the Future?” on prediction markets), the bidders get the value right. A set of bids that might plausibly occur would be $60,000, $80,000, $100,000, $120,000, and $140,000. These bids average to the true value of $100,000, but the winning bid of $140,000 is $40,000 too high.
How Many Pennies in the Jar?
Many economics teachers attempt to replicate Max Bazerman and William Samuelson's experiment (“I Won the Auction but Don't Want the Prize,” Journal of Conflict Resolution, vol. 27, no. 4, 1983, pages 618–634). The authors filled jars with coins or objects like paper clips and the ...
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