During the first public auction of Enron-abilia (office equipment, signs, etc.), over 1000 people were physically present.  An additional 14,000 were registered on line.  The famous four-foot tall "crooked E" sign sold for $44,000.  Many pieces of used equipment sold for more than they sold for new.  For example, a 20" Sony TV which retails for under $350 sold for $525.  (Houston Chronicle, 9/26/2002).

    About two months later, a second auction was held and the second  crooked E sign sold for $10,500.  About 200 bidders were present.  A much smaller group of people were registered on line. (Houston Chronicle, 12/4/2002).

Using the winner's curse and its associated leverage points, explain why these much higher prices were paid at the first auction than the second auction for the "crooked E" sign and other equipment. (6 points)

WINNERS CURSE NOTE

In an auction setting, the bidders will have a variety of estimates concerning the worth of the item being offered.  The mean of their estimates may approximate the true value of the offered item (as posited by the rational model of decision making).  However, it is the person with the highest estimate of value who will win the auction.  Thus, this person will pay too much.  The winner has won the auction with the highest bid but is cursed in that she/he paid too much. The winner's curse decreases as bidders gain experience. The leverage points are the number of bidders (more bidders produce more winner's curse) and ambiguity in valuation of the item being offered for auction (more ambiguity produces more winner's curse).

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