The fact that you have to reach for exotic scenarios … [such as] auctions by naive non-auction goers who don’t even know to account for winner’s curse or getting stuff for free should make you rethink what you are claiming about “most trades you make aren’t all that great”.
The thing I’m describing here is winner’s curse—my point is that the winning bidder (in example #5) overpays relative to the true value, while the median bidder (in example #6) neither profits nor loses. (A bidder whose model is mistaken such that they substantially underbid also profits $0). That is, there’s an asymmetry between your PnL when your model is correct (#6) and when your model is incorrect (#5).
Some auction goers know about winner’s curse; they likely make more conservative bids to protect against this. Some auction goers don’t. The person winning the auction is more likely to not be thinking hard about winner’s curse, or to have a sufficiently wrong pricing model to counteract the size of their adjustment in light of it.
The point is: conditional on winning the auction, you outbid every other person. You are at the extreme end of bids. The price you bid ($180) is a combination of your model of the wheelbarrow’s price ($200, with some uncertainty) and the amount of edge you ask for on account of winner’s curse concerns (10%, or $20). If you are the winner, it means everybody else either models the price as lower, or asks for greater edge, or (most likely) some blend of the two. If it’s just because they’re asking for more edge, your bid may still be profitable. But it’s likely some combination of the two, and their price models all (or almost all) being lower than yours should cause you to update that the true value of the wheelbarrow is lower than you’d previously estimated.
Probably worth including that the winner’s curse will also tend to be a feature when the object to be bought is a one time, one customer type setting.
Or would you agree that under your view, the market clearing price of a Walrasian auctioneer the price is also too high in some way? After all, it’s pretty clear from the simple S & D graph that most of the buyers could have, in theory at least and likely in reality if they could directly communicate, bough whatever they bough at a price lower than the market clearing price; S slopes upwards and includes the producers required rate of return.
Probably worth including that the winner’s curse will also tend to be a feature when the object to be bought is a one time, one customer type setting.
I don’t think the winner’s curse is limited to this; e.g., I think if the top five bidders win in an auction for vacation tickets (not knowing the value of the vacation package in advance), the effect still exists. It also doesn’t need to be a one time thing, or a unique good.
Or would you agree that under your view, the market clearing price of a Walrasian auctioneer the price is also too high in some way? After all, it’s pretty clear from the simple S & D graph that most of the buyers could have, in theory at least and likely in reality if they could directly communicate, bough whatever they bough at a price lower than the market clearing price; S slopes upwards and includes the producers required rate of return.
I don’t think the clearing price in such an auction is skewed high (if it were, you could profit in expectation by consistently selling, and this should correct the effect). I do think adverse selection concerns should enter your calculation even when submitting orders to two sided auctions like this one (e.g. any US stock market opening/closing auction), because your orders are still getting filled by the market as a whole, but I agree the dynamic does not have the directional bias of the auction I describe here.
The thing I’m describing here is winner’s curse—my point is that the winning bidder (in example #5) overpays relative to the true value, while the median bidder (in example #6) neither profits nor loses. (A bidder whose model is mistaken such that they substantially underbid also profits $0). That is, there’s an asymmetry between your PnL when your model is correct (#6) and when your model is incorrect (#5).
Some auction goers know about winner’s curse; they likely make more conservative bids to protect against this. Some auction goers don’t. The person winning the auction is more likely to not be thinking hard about winner’s curse, or to have a sufficiently wrong pricing model to counteract the size of their adjustment in light of it.
The point is: conditional on winning the auction, you outbid every other person. You are at the extreme end of bids. The price you bid ($180) is a combination of your model of the wheelbarrow’s price ($200, with some uncertainty) and the amount of edge you ask for on account of winner’s curse concerns (10%, or $20). If you are the winner, it means everybody else either models the price as lower, or asks for greater edge, or (most likely) some blend of the two. If it’s just because they’re asking for more edge, your bid may still be profitable. But it’s likely some combination of the two, and their price models all (or almost all) being lower than yours should cause you to update that the true value of the wheelbarrow is lower than you’d previously estimated.
Probably worth including that the winner’s curse will also tend to be a feature when the object to be bought is a one time, one customer type setting.
Or would you agree that under your view, the market clearing price of a Walrasian auctioneer the price is also too high in some way? After all, it’s pretty clear from the simple S & D graph that most of the buyers could have, in theory at least and likely in reality if they could directly communicate, bough whatever they bough at a price lower than the market clearing price; S slopes upwards and includes the producers required rate of return.
I don’t think the winner’s curse is limited to this; e.g., I think if the top five bidders win in an auction for vacation tickets (not knowing the value of the vacation package in advance), the effect still exists. It also doesn’t need to be a one time thing, or a unique good.
I don’t think the clearing price in such an auction is skewed high (if it were, you could profit in expectation by consistently selling, and this should correct the effect). I do think adverse selection concerns should enter your calculation even when submitting orders to two sided auctions like this one (e.g. any US stock market opening/closing auction), because your orders are still getting filled by the market as a whole, but I agree the dynamic does not have the directional bias of the auction I describe here.