Winner's curse
Win a common-value auction and you've probably overpaid.
What it means
The tendency for the winning bidder in a common-value auction to systematically overpay, because winning means having made the highest — and therefore most over-optimistic — estimate of the uncertain value. Even if every bidder's estimate is unbiased on average, the auction selects the one who most overshot, so naive bidding leads to losses. Rational bidders must counter it by 'bid shading' — bidding below their raw estimate to account for the adverse information conveyed by winning. It matters because it appears in oil-lease auctions, takeover battles, free-agent signings, and online ad markets, and is a vivid demonstration of failing to condition on the event of winning.
Examples
Oil companies that won drilling-rights auctions in the Gulf of Mexico frequently found the tracts worth less than they bid.
A club wins a bidding war for a striker by valuing him above what twenty rival scouts would pay — and the fact that nobody else went that high is itself the bad news.
The contractor who wins a sealed-bid tender is usually the one who most underestimated the job, then spends the build chasing change orders to claw the margin back.
First described in Capen, Clapp & Campbell (1971); Thaler (1988).