The Economics of Sport
  • Sports Economics
  • About
  • Workshop
  • Selected Publications
  • Book Reviews
  • A Primer on Gaelic Games
  • Upcoming Events
  • Media
  • Education
  • Resources & Links
  • Data

The Winners Curse in Sport

24/2/2015

 
By David Butler

The winner's curse is the tendency for individuals to overbid in common value auctions when information between buyers and sellers is not complete. If you are bidding in an auction with many others for an asset that you don’t know the value of, a winning bid can be overly optimistic and it can exceed the intrinsic value of the asset purchased. Simply put, if you win an auction when you don't really know what something is worth, there’s a chance you’ll be had! This curse has been shown to even affect experienced bidders.

This curse was originally conceptualized in light of auctions for oil reserves in the Mexican Gulf and famous experiments by William Samuelson and Max Bazerman during the 1980’s showed how buyers in the lab consistently fail to appreciate their information disadvantage when formulating a bid in bargaining games. When the best strategy to take is to opt out, the temptation to bid is too much for some. 

Economists have since looked to sport as a means to test for the winner's curse in the field. The big advantage of sport is that it provides scope for productivity evaluations that other auctions do not. We can tell how well an asset has performed after they are purchased, in this case a sports star.  

In particular, economists have looked toward baseball. The original study on the topic was by James Cassing and Richard Douglas. In 1980 the researchers analysed the bidding strategies of potential buyers of free agents in Major League Baseball, as naturally each franchise would place a different value on what a free agent is worth. The researchers found that from 1975 to 1980 free agents were overpaid relative to their productivity. A second study that cited the winner's curse was written in 1993 by Lawrence Kahn. While his research did not specifically set out to address the curse, Kahn ended up explaining his results in light of it. His study looked at salary and contract length for virtually all Major League Baseball players from 1987 to 1990. The winner's curse or 'super competitive' bidding was found again.  The most recent study comes from 2008 by John Burger and Stephen Walters who revise downward the strength of Cassing and Douglas’ (1980) original findings. Using superior measures of productivity to gauge player performance, they argue that there was positive returns to free agency over the late 1970’s and also the 1990’s. They suggest a ‘weak-form’ version of the winner's curse exists as the full expectations of buyers may still not be met.  

More information is often suggested as a solution to this curse but given that status and buying superstars for commercial purposes seems to be important across sports, it may always be the case that owners are not particularly concerned about efficiency or rational bids. Bounded rationality with a boosted ego may do just fine!

Comments are closed.

    Archives

    February 2023
    January 2023
    December 2022
    November 2022
    October 2022
    September 2022
    August 2022
    July 2022
    June 2022
    May 2022
    April 2022
    March 2022
    February 2022
    January 2022
    December 2021
    November 2021
    October 2021
    September 2021
    August 2021
    July 2021
    June 2021
    May 2021
    April 2021
    March 2021
    February 2021
    January 2021
    December 2020
    November 2020
    October 2020
    September 2020
    August 2020
    July 2020
    June 2020
    May 2020
    April 2020
    March 2020
    February 2020
    January 2020
    December 2019
    November 2019
    October 2019
    September 2019
    August 2019
    June 2019
    May 2019
    April 2019
    March 2019
    February 2019
    January 2019
    December 2018
    November 2018
    October 2018
    September 2018
    August 2018
    July 2018
    June 2018
    May 2018
    April 2018
    March 2018
    February 2018
    January 2018
    December 2017
    November 2017
    October 2017
    September 2017
    August 2017
    July 2017
    June 2017
    May 2017
    April 2017
    March 2017
    February 2017
    January 2017
    December 2016
    November 2016
    October 2016
    September 2016
    August 2016
    July 2016
    June 2016
    May 2016
    April 2016
    March 2016
    February 2016
    January 2016
    December 2015
    November 2015
    October 2015
    September 2015
    August 2015
    July 2015
    June 2015
    May 2015
    April 2015
    March 2015
    February 2015
    January 2015
    December 2014
    November 2014
    October 2014
    September 2014
    August 2014
    July 2014
    June 2014
    May 2014
    April 2014
    March 2014
    February 2014
    January 2014
    December 2013
    November 2013
    October 2013
    September 2013
    August 2013
    July 2013

    About

    This website was founded in July 2013.

    RSS Feed

    Categories

    All
    American Football
    Athletics
    Baseball
    Basketball
    Behavioural Economics
    Boxing
    Broadcasting
    Competitive Balance
    Cricket
    Cycling
    Darts
    David Butler
    Declan Jordan
    Drugs
    Ed Valentine
    Epl
    Esports
    Expenditure
    F1
    Fifa World Cup
    Finances
    Funding
    Gaa
    Gaelic Games
    Gambling
    Game Theory
    Gary Burns
    Geography
    Golf
    Greyhound Racing
    Guest Posts
    Horse Racing
    Impact Studies
    John Considine
    John Eakins
    League Of Ireland
    Location
    Media
    Mls
    Mma
    Olympics
    Participation
    Paul O'Sullivan
    Premier League
    Regulation
    Research
    Robbie Butler
    Rugby
    Simpsonomics
    Snooker
    Soccer
    Spatial Analysis
    Sporting Bodies
    Stephen Brosnan
    Swimming
    Taxation
    Teaching
    Technology
    Tennis
    Transfers
    Uefa
    Ufc
    World Cup
    Wwe

Related

The website is not formally affiliated to any institution and all of the entries represent the personal views and opinions of an individual contributor. The website operates on a not-for-profit basis. For this reason we decline all advertisement opportunities. 

Contact

To contact us email sportseconomics2013@gmail.com or find us on Twitter @SportEcon.