Major tip to Shake. Great find.
Once the top free agent is signed in any given year, the market is now ‘set’ for other lesser players. The Winner’s Curse tends to inflate the price of similar goods across the market place, creating a bubble. The real estate or stock markets may not be so different from the free agent market in the NFL. Which home buyer is going to be the one that ends up with that McMansion? The one who overestimates its value the most, that’s who. And with each inflated sale, all home prices inch up one more tiny notch, at least until a market correction comes along.
Bidders who are aware of the Curse can mitigate its effect by suppressing their bids below what they believe is the true value of the prize, a technique known as bid-shaving. This makes it less likely a bidder will end up overpaying, but it also makes it less likely the wise bidder will win the auction. The unsavvy bidder (such as Dan Snyder, perhaps) won’t shave his bids, and becomes that much more likely to win (and overpay for) the prize.
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