Winner’s curse is said to act when the highest bidder in a multiparty auction or in similar scenario bids a value for a product which is higher than its actual or intrinsic worth.
Winner’s cause can be attributed to emotional and cognitive factors in a bidder. This phenomenon often results in reduced returns for an individual. Winner’s cause occurs because of a lack of understanding of the asset in consideration.
Suppose a teacher brings to class a book and asks his class to bid for it.
A student bids the highest for the object, say Rs.500, only to find out the book’s actual value is Rs.350. In this case, because of a lack of knowledge about the book, winner’s cause has kicked in and the student has to pay Rs. 150 more than the intrinsic value of the book.