The Winner's Curse: When Winning Is Actually Losing

Understanding the Winner's Curse: How Overpaying Leads to Losses

Welcome to the Bryan Foltice Behavioral Finance Podcast! In this episode, host Dr. Bryan Foltice delves into the intriguing phenomenon of the winner's curse—a situation where winning can actually mean losing. By examining real-world examples ranging from eBay auctions and trading card businesses to sports contracts and major acquisitions, Dr. Foltice explains how overconfidence, emotional decision-making, and asymmetric information often lead to overpaying. He also shares practical strategies to recognize and avoid falling victim to this financial pitfall. Tune in for valuable insights on making smarter, more informed financial decisions.

00:00 Introduction to the Brian Foltis Behavioral Finance Podcast
00:27 Understanding the Winner's Curse
01:36 Personal Experience with eBay Auctions
04:47 Emotional Decision Making in Auctions
05:37 The Loser's Curse in Sports Contracts
07:28 Overconfidence and Emotional Decision Making
10:29 Examples of the Winner's Curse in Business
14:12 Avoiding the Winner's Curse
17:20 Conclusion and Listener Engagement

Transcript

0:04

Welcome to the Brian Foltis Behavioral Finance Podcast, where we unravel the mysteries of behavioral finance and unlock the secrets to making smarter, more informed decisions with your money. Now here's your host, Dr. Brian Foltis. Welcome everybody to the Brian Foltis Behavioral Finance Podcast. My name is Brian Foltis. And today we are going to unpack the winner's curse. When winning is actually losing and We're going to see this phenomenon from different angles here and sometimes when it comes to financial deal making or if it's simply winning a bid or an auction on eBay or Some of the assets that we buy and what we're paying for them. And we're going to see what this is and hopefully be able to recognize this and be able to step away before we fall victim to this winner's curse. Oh, what I've realized here. is I've always known that there's the loser's curse and then there's the winner's curse, but I didn't know that they were both pretty much the same thing. So this winner's curse is a concept here in behavioral economics that happens when somebody wins a competition. But overpays or gets an outcome that is worse than expected. You see this, I don't know if you've ever do eBay auctions back in the day. I know that still here in 2025. I am active in eBay auctions in order to get inventory for my trading card business that I've been running with my older son at this point. And he is at the point where he says, dad, I don't really want to do this anymore. So here I am stuck with this business. I think we did just under a hundred thousand dollars in sales in 2023. I've tried to wind it down only to ramp up the little store again and we did I just did taxes here So I think we were at about 54, 000 in sales this year. So once again, we're selling these 1986 flier basketball cards sometimes graded sometimes not and the idea though is sometimes If there's an auction for a large lot of cards, then, and they seem to be in decent condition, then one of my strategies is to bid on that auction and then to sell the cards that aren't going to get good grades and just peel those off and package those in ways that I feel are going to get the best. and then also send away to get the good cards or that I perceive to have good, get those graded and then be able to sell those. And I started this a few years ago. This was something that I did for a couple of reasons. First, there was a nostalgia reason that I did these cards. From college when I was going through my undergraduate school, my dad and I We did eBay sales and got cards graded in a very similar fashion. And it was a great way for me to stay connected with my dad. And while I was in college and started business and I even did my full internship based on this business that I was more or less running for them. And then I also noticed there were some ambiguity aversion. So people. They don't like uncertainty versus, risk. And with this ambiguity aversion, if you're looking at ungraded cards, there's a lot of uncertainty as to what they actually are from a grade value. And people don't really like that. I noticed they were really shying away. From what I was seeing people bidding on them and the actual results that I was getting from the grades, they were off and they were showing this ambiguity aversion. So I said, all right, I'm going to try to get comfortable in this uncertainty. And I'm going to just buy some of these lots, get them graded, see if I can build a business off of it. And at the same time, do this as a memorial to my dad who passed away about six years ago now. And. And just, it helped me, go through some things when I was really missing them. And I would just go and do some cards and sell some things in my little office. And that's what I was doing, but I also now realize here in this these auctions. Once you get going, you get that feeling of I really want to win this. And I know there's a bunch of other people who are watching this item and they're going to be bidding on this at the last second. And so I had to really figure out my price. And sometimes in hindsight, you look at that and you go, Ooh, man, I took that one. I took that one on the chin. Why did I do that? And. This winner's curse goes right to the core of that, where we use our emotion and we start building this up and we pay too much and we suddenly have a regret behind it or regret around it. And once again, winning becomes losing once we've won those auctions and realized we've overpaid for it. And so of course you see this in eBay auctions. But what about with sports contracts? This is where we call this the loser's curse. So in sports, if you were the worst professional team in basketball, baseball, and football in the U. S., you don't go down a league like you would in other international sports. You stay in the same league, but in the next year's draft, you get. The top picks and or you have the higher probability or highest probability to get. the first pick in next year's draft. And so here is where the losing team gets first pick and they've won this lottery in order to get the best player in the whole world that's coming out to be a professional and they get first dibs on them. And what we've seen here is, historically, there is a tremendous overpaying to get this player. And this is where this loser's curse, and it perpetuates the losing cycle for that team, because now they're overpaying for a player who is underproducing, and then they find themselves right back with that top pick in the next year, and they continue on. Once again, I've seen this from the a front row being a Detroit Lions fan here in the US and over the years watching them pay too much for underproducing top picks over and over again and this is now once again what we can formalize what we're calling this. This is our winner's curse or in this case of sports contracts can be a self perpetuating loser's curse. And so we have a couple of different things here that's driving. These, this curse here, this kind of behavior. And first of all, we see there's some overconfidence around our abilities to come up with the right price. And this is where we feel like we know what the price is supposed to be. We feel like the player we know is. what it's going to be. And so we're very confident in this player's performance that they're going to change our franchise or this lot of cards is going to have a bunch of really high graded cards. I'll get my money back. No problem. So overconfidence bias always takes effect because every card I send. To the grading company. I'm always thinking every time it's got to be. Oh Nines and tens all day long and man I can't wait and then they come back and it's I got a number of sixes or sevens I'm always offended by it and eights and I'm always overconfident in the cards that I send and they always bring me back down to reality. Although they do somehow figure out a way just for me to make money. So they continue. So they're really smart about this at the grading card company. And I'm not sure if they're doing this on purpose, but it's just enough that I know I'm going to get my money back. I'm going to make a little extra money on it, but I'm not getting rich and they've just got me pulled into this. And once again, this is overconfidence. We also have some emotional decision making. This is where you start feeling your competitive nature take over and you get emotional. Now you would think I. You have been doing behavioral finance for a number of years and you have, you're able to non emotionally trade or not be emotional and that's simply not the case. Emotions still take over and you still are feeling that thrill of winning and so you're gonna increase your auction bid just by a little bit more because I don't want to wake up the next morning and know that I've given it away or somebody else has won this. This always tends to Have me increase my auction bid if we have some sort of overnight auction. And once again, this goes beyond fundamental. What I actually think I'm going to get and what would be smart and prudent. The emotions are taking over here in the decision making process. And thrill of winning clouds our rational thinking. Emotional decision making. So three drivers. Overconfidence. Emotional decision making. and asymmetric information. So this is where the seller usually knows more than the buyer. And The person selling this, of course, we're trying to look at some of the pictures and different things around the grades and everything, but sometimes the seller does no more than the buyer. And so the buyer is always at this disadvantage when it comes to these auctions. We also have a good example here with Yahoo. Buying Broadcast Broadcast. com in 1999 for 5. 7 billion dollars one of the biggest acquisitions of the dot com boom and wouldn't you know, they were in this bidding war and I thought live internet streaming was going to be the next big thing, so I guess they were a little bit ahead of their time here and Broadcast. com flopped, Yahoo shut it down and that 5. 7 billion dollars was. Totally a sunk cost. We see NFL, which we've already talked about, that number one pick. And this used to be, that number one pick used to have unlimited signing bonuses. And That goes back to 2007. We got Jamarcus Russell. Anybody remember Jamarcus Russell, the Oakland Raiders quarterback? And he was signed with a signing bonus of 61 million back in 2007. And From the get go was a underperforming disaster. He gained weight out of the NFL in three years. And this is one of many draft busts and with the new salary cap there was their collective bargaining agreement and it was called back in 2012, where they actually capped some of this and created some more less ability for teams to overpay on this. And. It seems to have moderated the effect, but I actually did a case study or a paper that didn't get published. And this is where you say, just try to do research in behavioral finance and stop doing NFL draft papers into it's out of my league, out of my world. But I still was really interested in, and I had a student who wanted to do this as a study. So that's why we have this unpublished paper that showed though, that even after the collective bargaining agreement, That there was still some mispricing, which means teams were still overpaying for those top picks and it makes more sense to trade down, which we're actually seeing more teams do. In these NFL drafts, pay less, have more picks to give you a more of an opportunity to let these more or less random situation work in your favor. And anyway, we had that with NFL picks. And now we have some of these different markets that seem a bit bubbly and seem a bit time will tell, but we had the housing market back in 2008 where we had these bidding wars and this fear of missing out. We saw another little example here in the United States back in 2021. Where we had those low interest rates and everyone was trying to buy houses and just could not get Even an offer in because there were multiple offers and it was bidding wars just going up and up and We've seen people paying way too much for that. We could see people paying a hundred thousand, a hundred five thousand dollars for a Bitcoin. Time will tell if that's a good or a bad thing. But once again, if we have this fear of missing out, that we're gonna miss out on this, and so we're just gonna buy and we've lost sight of fundamental value. We just know that, hey, perhaps It might be foolish for me to buy this, but the greater fool theory suggests that if I can sell it for a higher price to a greater fool, then this is still going to be profitable for me. So we've beat that around here. Let's talk about how we can avoid this. Once again, this kind of comes back to a sober thought process around fundamental value. So trying to understand what is the max value that I'm willing to pay that makes sense in my life and try to drown out the crowd and the others that are in this market or in this auction with you. And this goes back to even the NFL teams when they're trying to draft. I've noticed in our studies, even after the collector bargaining agreement that quarterbacks, high profile quarterbacks continue to be way. overpaid based on their performance and I think a lot of this has to do with some emotion driven by fans not just the organization but trying to put hope and give fans hope and usually it's the one position that can instantly change a franchise and give them hope is the quarterback position so this is where we still to this day see that miss pricing but know your maximum value Set a ceiling price of that fundamental value that you've determined and then just let the chips fall where they may. Number two, don't let emotions drive your decision and try to take a step back, ask yourself, am I paying for the value, actual value that is out here, or am I paying just to feel the win? And this should be your time to say, Ooh, I'm starting to get emotional. I'm starting to just really trying to anticipate the feeling of winning. I should really start to pump the brakes on these bids. Watch for overconfidence. We said that's a big driver of this curse and understand that if there's a lot of noise and there's a lot of others that are hyping this up, this is often called group think when something's hyped up about something. Once again, this should be our signal that overpricing exists and that we should leave the party if we haven't done so already. And then finally, See if we can learn from others mistakes. And the Jarmarcus Russell bust and the housing frenzy. So seeing these patterns, seeing if we can detect the patterns before And that's what we're doing. It's very difficult because you will be on the outside looking in. That's why we're talking about Bitcoin here and some of these cryptocurrencies, we don't know what's going to happen. It seems a bit high, but could continue to go even more but we're trying to use all these past patterns and see if we can try to predict them. When we talked in our last. One our last episode that our detection of patterns is not always perfect We saw that in the Super Bowl effect and that causation does not always cause Our correlation does not equal causation But again as we're trying to not overpay for stuff. These are some of the things that we should be Alright have, here's some truth telling time. Have you ever fallen victim to the loser's curse? And want to bid on something? I definitely have. Overpaid for something? Would love to hear from you. Please let me know if there's any questions that you have or anything I can do to assist you. And don't hesitate to go check out BrianFoltis. com for some of the free resources and behavioral finance. I'll have some links to some of the mini courses that we have. I'm in the middle of my spring semester right now, and we're doing the same behavioral finance course that I'm trying to put out online, both for a very small fee on udemy. com right now. And then I'm rolling out each video. One by one for free on YouTube. So check me out and hopefully you like what you're hearing. If you have any questions or comments, let me know. Otherwise have a wonderful day. Thanks for listening today. for tuning in to another episode of the Brian Foltis behavioral finance podcast. We hope you found our exploration into the fascinating world of human behavior and finance, both enlightening and thought provoking. Be sure to subscribe for. Future episodes and until next time, stay curious and financially savvy.