The winner’s curse is a phenomenon that may occur in common value auctions with incomplete information. The winner’s curse says that in such an auction, the winner will tend to overpay. In a the winning theory in stock market pdf download value auction, the auctioned item is of roughly equal value to all bidders, but the bidders don’t know the item’s market value when they bid.
Each player independently estimates the value of the item before bidding. The winner of an auction is the bidder who submits the highest bid. Since the auctioned item is worth roughly the same to all bidders, they are distinguished only by their respective estimates of the market value.
The winner, then, is the bidder making the highest estimate. If we assume that the average bid is accurate, then the highest bidder overestimates the item’s value. Thus, the auction’s winner is likely to overpay. More formally, this result is obtained using conditional expectation.