Two recent newspaper pieces show the importance of the “winner’s curse” in baseball. As discussed in the Firms and Markets course, the winner’s curse takes place in common value auctions when the winner finds out he was too optimistic in his assessment of the item’s value – so that by winning he loses (unless, of course, the bidder takes the Firms and Markets course).
Exhibit 1 comes from a NYT piece on free-agent trades. “When a guy has played for you, you know him intimately,” Mark Attanasio, the Brewers’ owner, said. But if you don’t know the player as well as other teams (asymmetric information) and are bidding in competition with a number of them, then “most times when you sign a player, you’re the only team in the game that was willing to pay him that money,” said Alex Anthopoulos, the general manager of the Toronto Blue Jays. It sounds like a tautology, but that’s the point of the winner’s curse.
Exhibit 2 comes from a WSJ piece on the sale of the LA Dodgers. After extensive negotiations, MLB accepted Frank McCourt’s proposal to auction the team, an operation which is expected to fetch as much as $1 billion. “People familiar with the strategy say the more a bidder knows about his future revenues, the more comfortable he will be raising his bid,” states WSJ’s Matthew Futterman. This is consistent with one of the main points discussed in class regarding adverse selection and the winner’s curse: the less information you have, the more conservatively you should bid so as to avoid the “curse.”
Posted by Luis Cabral with thanks to Larry White and Shelly Banjo.