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Overcoming the winner's curse: an adaptive learning perspective
Author(s) -
BerebyMeyer Yoella,
Grosskopf Brit
Publication year - 2008
Publication title -
journal of behavioral decision making
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.136
H-Index - 76
eISSN - 1099-0771
pISSN - 0894-3257
DOI - 10.1002/bdm.566
Subject(s) - winner's curse , curse , perspective (graphical) , phenomenon , value (mathematics) , variance (accounting) , order (exchange) , task (project management) , economics , microeconomics , computer science , common value auction , econometrics , artificial intelligence , management , machine learning , sociology , epistemology , philosophy , accounting , finance , anthropology
The winner's curse phenomenon refers to the fact that the winner in a common value auction, in order to actually win the auction, is likely to have overestimated the item's value and consequently is likely to gain less than expected and may even lose (i.e., it is said to be “cursed”). Past research, using the “Acquiring a company” task has shown that people do not overcome this bias even after they receive extensive feedback. We suggest that the persistence of the winner's curse is due to a combination of two factors: variability in the environment that leads to ambiguous feedback (i.e., choices and outcomes are only partially correlated) and the tendency of decision makers to learn adaptively. We show in an experiment that by reducing the variance in the feedback, performance can be significantly improved. Copyright © 2007 John Wiley & Sons, Ltd.