At an auction, who wins? The highest bidder, who outbids everyone else. Let’s ask another question … who loses? Maybe this same bidder as he’s outbid everyone else, and possibly paid more than market value?
Can someone pay more than market value at auction? Isn’t whatever it demands at auction the definition of market value? At the very moment of, “Sold!” it might be market value, but can immediately thereafter be worth more or less … we wrote about the Supreme Court of Ohio ruling that an auction results in market value:
Larry McCool famously noted that auctions are an illusion. While bidders have a chance to get a deal, the winning bidder bids more than anyone else, and as such probably (maybe) doesn’t get a deal:
The winner’s curse is the result of basically two possible scenarios: The buyer pays more than the subject lot is actually (shortly thereafter) worth, or the subject item is in fact (shortly thereafter) worth less than the high bid.
The winner’s curse involves both cognitive/common and private/emotional evaluation. It’s often not realized until after the purchase when the buyer realizes he essentially won and lost at the same time.
There might not be any auctioneer who’s not sold something and said “I can’t believe what they paid for that …” Of course, if they are taking home to enjoy then all’s good. However, if they are hoping to resell for a profit or finance, that might be difficult if not impossible.
Markets do change, but in some product types, this can take years and even decades … possibly longer than some buyers have to wait. We discussed in detail how many markets continue to change in this treatise:
Can you avoid the winner’s curse? First, work to find out absolutely as much as you can about the subject property.
- If you want the property and it’s entirely your decision — bid whatever you wish to obtain it (private/emotional valuation.)
- If you wish to buy and require financing to support your purchase or wish to eventually resell, bid to purchase at or below what you think it’s worth in the market (cognitive/common valuation.)
Mike Brandly, Auctioneer, CAI, CAS, AARE has been an auctioneer and certified appraiser for over 30 years. His company’s auctions are located at: Mike Brandly, Auctioneer, RES Auction Services, and Goodwill Columbus Car Auction. He serves as Distinguished Faculty at Hondros College, Executive Director of The Ohio Auction School, and an Instructor at the National Auctioneers Association’s Designation Academy He is faculty at the Certified Auctioneers Institute held at Indiana University and is approved by The Supreme Court of Ohio for attorney education.