ORGANIZATIONAL BEHAVIOR AND HUMAN DECISION PROCESSES Vol. 67, No. 2, August, pp. 170–180, 1996 ARTICLE NO. 0072 Learning to Avoid the Winner’s Curse PETER FOREMAN University of Illinois, Urbana-Champaign AND J. KEITH MURNIGHAN University of British Columbia, Vancouver, British Columbia, Canada shore oil leases and the sale of estates, use auctions to The winner’s curse is frequently observed in auc- reach relatively quick, seemingly efficient agreements. tions: The person who bids the most and wins the auc- The popularity of this market clearing mechanism tion may ultimately regret the bid since it often ex- might imply that it is efficient for the parties, who typi- ceeds the value of the object being auctioned. Ball, cally participate voluntarily. Yet research (Kagel, Bazerman, and Carroll (1991) have shown that re- 1995) shows that, under normal conditions, where bid- peated experience as a bidder leads to little learning ders are uncertain about the value of the object, the and repeated winner’s curses. The current study inves- highest bidder frequently overestimates its value and tigated whether feedback and relevant experience overbids. The losses they incur are called ‘‘the winner’s could contribute to bidders learning to avoid the win- curse.’’ ner’s curse in the two tasks that have dominated win- ners’ curse research. The results showed that experi- The winner’s curse appears in many diverse settings: ence had little impact and that additional feedback public and private auctions (Capen, Clapp, & Camp- reduced overbidding but never extinguished the win- bell, 1971; Kagel & Levin, 1986; Bazerman & Sam- ners’ curse; instead, it was pervasive and highly resis- uelson, 1983), corporate takeovers (Roll, 1986), book tant to learning. High endowments and limited feed- publishing rights (Dessauer, 1981), free agency in base- back, in particular, led to the most extreme curses. ball (Cassing & Douglas, 1980), and economic markets The results are discussed with respect to the emotions in general (Akerlof, 1970). Capen, Clapp, and Camp- associated with winning and the emotional bases of bell’s early (1971) paper aptly describes this adverse risky decision making.  1996 Academic Press, Inc. selection problem: ‘‘In competitive bidding, the winner tends to be the player who most overestimates the true tract value... He who bids on a parcel what he thinks Auctions are a commonly used mechanism to negoti- it is worth will, in the long run, be taken for a cleaning.’’ ate the price of a commodity. In Holland, cut flowers are This negative outcome becomes more likely as the num- auctioned off in large quantities in the appropriately ber of bidders or their uncertainty about the value of named Dutch auction: The price of the flowers starts the object increases (Kagel, 1995). high and then falls until a bidder agrees to pay that Bazerman and his colleagues (Ball, Bazerman, & price. One bid completes the auction. The more familiar Carroll, 1991; Bazerman & Samuelson, 1983; Carroll, English auction, which is often used at wine, art, and Bazerman, & Maury, 1988; Samuelson & Bazerman, household sales, involves people making larger and 1985) have studied the winner’s curse using the ‘‘ac- larger bids for an object, with the highest bidder win- quiring a company’’ problem, where a buyer’s single, ning. Many negotiations, including the rights to off- one-time bid is either accepted or rejected by a seller. Ball et al.’s (1991) findings are particularly surprising: Bidders who were given feedback immediately after The authors gratefully acknowledge the extremely helpful sugges- each of their twenty consecutive bids never learned to tions of Max Bazerman, John Kagel, Greg Oldham, Madan M. Pil- lutla, and two anonymous reviewers on an earlier version of this avoid the winner’s curse: ‘‘Our subjects failed to learn paper. We also thank the Social Science and Humanities Research in an environment that has led virtually all audiences Council of Canada for research support for the second author. Ad- exposed to this experiment to predict learning within dress reprint requests to J. Keith Murnighan who is now at North- 20 trials’’ (p. 17). These results were particularly puz- western University, KGSM/OB/Leverone/360, 2001 Sheridan Road, Evanston, IL 60208-2011. zling since the authors, in their own words, ‘‘incorpo- 170 0749-5978/96 $18.00 Copyright  1996 by Academic Press, Inc. All rights of reproduction in any form reserved.