Can you win and yet still lose?

It is a common assumption that winning is a positive thing and most of the time that is true. However, are their situations when being the winner is actually a net negative experience? According to Nobel Prize winning Behavioral Economist Richard Thaler, this happens more often than you think.

In a recent Planet Money episode, host Greg Rosalsky, explores Thaler’s concept of “The Winner’s Curse.” This idea arose from Thaler’s pushback against traditional economics.

In column after column, Thaler shined a spotlight on anomalies that didn’t fit with the tidy, mathematical portrayal of humans in popular economic models (“Anomalies” was actually the title of the column.)

One anomaly Thaler highlighted was what he called “The Winner’s Curse.” The winner’s curse refers to the winners of auctions. That includes the classic auction with auctioneers speaking really fast, selling antiques or paintings or whatever. But it also applies to markets where people competitively bid against each other to buy something, which includes things like bidding wars over buying a house, companies competing to acquire other companies, and sports teams fighting to sign star rookies in a draft.

What Thaler challenged was the idea that winning is everything. In his view, sometimes it was better not to win because the economic benefit of the item in question is outweighed by the cost of acquiring it in the auction.

In the standard economic way of seeing auctions, the winner is someone who values it the most after a careful cost-benefit analysis of what they’re bidding on, using the best available information. Presumably, the winner is, well, the winner. But what if the winner is, more often than not, actually the loser? What if winners, systematically, are the ones who pay too much for what they’re buying?

In one of his columns, Thaler suggested exactly that. That, actually, in competitive auctions, the winner is often the one who makes a mistake and overpays. That is, the winner is someone who — perhaps irrationally — buys something for more than it’s worth. Hence the curse.

The Winner’s Curse is not limited to auctions. Think about the number of times you have rushed to buy the last item on sale and later discovered it wasn’t worth the money. Or consider the game show contest who wins a prize yet is now required to pay high taxes afterwards in order to claim it. We see it in professional sports teams who trade away too many players and draft picks in order to claim on supposed superstar who then flops.

So how does one avoid The Winner’s Curse? Thaler has a simple answer.

Thaler told us: “The way you have to think about bidding in an auction is: if I win the auction, will I be happy?”

To read more about The Winner’s Curse and how to avoid it, please read the rest of the Planet Money article.