behaviour
The winner's curse
The rule
In a crowd all rushing to buy, you "win" the prize mostly when you have overpaid for it.
Where it flips
Not every easy fill is a trap; sometimes you are simply early. Where it misleads: you assume all easy buys are bad. The fix: ask why this is so cheap and easy for you, and value it on its own, apart from the crowd's excitement.
When many eager buyers fight for the same thing, like an auction or a hot IPO, the one who "wins" is usually the one who bid the most. That means he overpaid. If a deal is truly good, insiders keep it. The small buyer gets a full, easy allotment exactly when demand is thin, because the thing is not worth the price.
A worked example
In a hyped IPO the good ones are heavily oversubscribed, so you get almost nothing. The one where you get your full allotment is the one that smart buyers quietly avoided. [illustrative]
How to spot it
- ·a full, easy allotment of a "hot" deal
- ·many buyers bidding the price up
- ·the seller choosing the timing and the price
Richard Thaler · Behavioural finance research