[HN Gopher] Winner's Curse: Negotiation Mistakes to Avoid
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Winner's Curse: Negotiation Mistakes to Avoid
Author : andsoitis
Score : 88 points
Date : 2023-08-24 18:33 UTC (1 days ago)
(HTM) web link (www.pon.harvard.edu)
(TXT) w3m dump (www.pon.harvard.edu)
| JackFr wrote:
| In bond trading a BWIC (bids wanted in competition) or 'bid list'
| is a list of bonds for sale that a seller would send to a number
| of banks with a set time for all bids to be in. As a bidder you
| would be notified of whether or not you won the bonds, and the
| what the second best price was (the cover). This would allow you
| to know where you were with respect to the other bidders.
|
| Except back in the old days (pre-crisis) there was no way to keep
| people honest, and people would routinely lie about the cover and
| always tell everyone the cover was just a tick below the winning
| bid, so if someone made an egregiously bad bid, hopefully they'd
| never realize...
|
| Now all transaction get printed on the TRACE feed, which is
| probably better for the market.
| nico wrote:
| Reminds me of house buying. Realtors are experts at getting
| bids and creating a high stakes competition with 0 transparency
| or accountability. They can easily lie or mislead people (and a
| lot of them do).
| petesergeant wrote:
| I'm currently building a set of tools to teach negotiation skills
| through interactive scenarios, with a hope to focus on enterprise
| sales, and then eventually using machine learning to analyse
| actual negotiations. If that's something you have a need for
| right now (esp if you work in enterprise sales), do feel free to
| drop me an email at pete@negoat.io
| slavboj wrote:
| The negotiation is won before the actual bid by having a better
| cost / payoff structure going in.
| georgeecollins wrote:
| [flagged]
| FrustratedMonky wrote:
| If all bidding processes followed rational rules.
| smath wrote:
| I think what this article misses is that 'value' is a
| personal/subjective thing. Value is not the same as price. To me,
| the value of a house might be higher than to you (say because I
| am more desperate to move out of a tiny apartment). This does not
| hold for the jar of coins example in the article of course.
| WalterBright wrote:
| Value is the price you would buy/sell it for. There is no other
| useful definition of value.
| rahimnathwani wrote:
| When you place bids or asks in a market where some participants
| are knowledgable ('informed'), the execution of your transaction
| indicates a likelihood that your counterparty is one of those
| informed traders.
|
| This should prompt you to adjust your initial bid or ask price.
| Knowing this dynamic in advance, you can set your initial bid or
| ask with the assumption that it will be executed by an informed
| trader, or assuming an X% chance that the trader is informed.
| This is part of the reason for the existence of bid/ask spreads.
|
| Winner's curse seems similar. When deciding your bid, you have to
| decide 'if I will in the auction at this price, will I be
| happy?'.
|
| This is subtly different from "what's the most I'm willing to pay
| based on the information I have today?".
| jrh3 wrote:
| This is just "Buyer's Remorse"
|
| Value and price are wonderful, but something is worth what people
| are willing to pay for it.
| chias wrote:
| Doing my best to summarize what I got from this article:
|
| 1. In an auction, is possible to over-bid on a thing
|
| 2. If you over-bid on a thing and you win, that's not good
|
| 3. It's better to not win the auction than it is to win it by
| bidding higher than you value winning the auction
|
| 4. The Big Insight: before you bid, stop to think about whether
| you're about to bid higher than you value what you're bidding on.
|
| ...what am I missing? Why is this interesting? What does this
| have to do with negotiation? What are the negotiation mistakes to
| avoid?
| tommiegannert wrote:
| Only bid if you have already sold the thing to someone not in
| the auction. :)
|
| https://en.wikipedia.org/wiki/Winner%27s_curse
|
| If you have alternatives to participating in this auction,
| perhaps you should abstain. Also related to BATNA:
| https://en.wikipedia.org/wiki/Best_alternative_to_a_negotiat...
| HWR_14 wrote:
| That's only true if items with a defined but unknown at the
| time of bidding. A piece of art doesn't suffer from the
| winners curse if you are buying it to enjoy.
| pessimizer wrote:
| Yes it does. There could be another piece of art that you
| would "enjoy" equally, but pay less for. If no other piece
| of art will do, then you yourself are equivalent to the
| pocket buyer.
|
| edit: if you're using "enjoy" to mean "have a private value
| rather than a shared one," a pocket buyer _is_ a private
| value. If, instead, your level of enjoyment of the item is
| around the same level as the rest of the bidders, then
| there 's no reason why the Winner's Curse wouldn't apply.
| tomjakubowski wrote:
| > If you have alternatives to participating in this auction,
| perhaps you should abstain.
|
| totally off-topic I know -- it's a great answer to so many
| dull thought experiments too. Like this one that was going
| around Twitter recently: Everyone
| responding to this poll chooses between a blue pill or red
| pill. - if > 50% of ppl choose blue pill,
| everyone lives - if not, red pills live and blue
| pills die
|
| Just walk away! It's so easy!
| bawolff wrote:
| > What does this have to do with negotiation?
|
| You can negotiate for a contract job such that it costs you
| more to do the job than your negotiated price, or otherwise
| isn't worth it.
|
| I agree its not the most insightful article
| rocqua wrote:
| A core point is the line "Analyze whether the asset has a
| common value element. A common value asset, like a jar of
| coins, has equal value to all bidders. If so, bid with
| caution."
|
| In auctions where the asset does not have equal value to all
| bidders, the winners curse is less likely to apply. Because if
| you guess the value of the object higher than all others, that
| can happen because it is fundamentally worth more to you,
| rather than because you had the most over-estimation.
| HWR_14 wrote:
| Which is why "jar of coins" is a bad example. To a collector,
| a jar of coins may be worth more than face value, depending
| on what is in there.
| SkyPuncher wrote:
| > 4. The Big Insight: before you bid, stop to think about
| whether you're about to bid higher than you value what you're
| bidding on.
|
| How do you define value? How does it consider fungible factors?
|
| ----
|
| My wife and I "overbid" on our house. We have absolutely no
| idea how much we "overpaid". Could be 0%, could be 10%, could
| be -10%.
|
| If we did it again, we'd take the exact same approach. Winning
| that bid had little to do with the actual value of that house,
| other than knowing where to put a value on the bid. It solved a
| major problem for us - we need to move to a new city where
| housing in in extremely short supply. Putting that bid in and
| winning meant saving weeks/months of effort looking, touring,
| driving out of state, putting bids in, holding our breath, etc,
| etc.
|
| In an auction, the winner will always give an unnecessary
| concession (whether that's excess cash or some other
| contractual term). That's simply the nature of competition;
| especially with asymmetrical knowledge.
| robotresearcher wrote:
| The article clearly says that the phenomenon applies only to
| auctions where the final value is approximately the same to
| everyone.
|
| You describe a situation where a quick purchase is very
| valuable to you, so getting the sale is worth a higher bid to
| you than to someone who could take their time getting a good
| price, such as an investment buyer.
|
| So the phenomenon is much weaker or irrelevant in your case
| because all buyers are not estimating the same absolute value
| to them.
| WalterBright wrote:
| > How do you define value?
|
| The buyer defines it as he sees fit, so does the seller. No
| sale happens unless they both agree on the value.
| anamexis wrote:
| It seems like you're using a different definition of overbid
| here. You didn't bid higher than what you value the house at,
| presumably, otherwise you wouldn't do it again.
| yccs27 wrote:
| Intuitively, you might think "I'll just bid a few cents less
| than what the thing is worth to me, then I'll get a fair deal".
| However:
|
| 1. You likely don't know the value exactly, so you might
| overbid (or underbid)
|
| 2. If you overbid, you will probably get the thing and lose
| money
|
| 3. If you underbid, you are less likely to be awarded the
| thing, so on average the gains (from getting it below value)
| are lower than the losses (from overpaying).
|
| 4. The Big Insight: To still get a good deal on your average
| auction _win_ , you need to adjust your bid downwards to
| account for your imperfect knowledge.
| crdrost wrote:
| Yes. It's not a terribly interesting article but I would
| describe it from an external perspective as,
|
| "People bid based on a sort of mean value: they don't know
| how much this thing is worth to them, so they make an
| uncertain guess, that guess has a mean.
|
| "But, that guess also has a standard deviation. And if you
| have 100 identical people doing a one-time closed bid on the
| thing, they all have identical mean valuations but the bid
| that will win will probably be 2-3 standard deviations over
| the mean. In these situations, _the more wrong you are, the
| more likely you are to win, and the less you will like what
| you win._ This is the winner 's curse.
|
| "You can avoid this by being cognizant of your status as one
| of the pool of 'identical people', how many people are
| similar to you, and tempering your bids downward in relation
| to that. A jar full of money has a similar value to everyone
| who is in the audience -- this creates the dangerous
| condition! A unique statement piece from an otherwise
| unremarkable artist, is going to attract some interested
| parties and some revulsion: so if you dig it, you are
| probably in the minority and don't need to worry so much
| about the winner's curse."
| JamesBarney wrote:
| Or to put it another way.
|
| Everyone has incomplete information. If you bid more than
| everyone else it's because one of the following is true.
|
| 1. It is more valuable to you than anyone else.
|
| 2. Everyone else is mistakenly undervaluing it
|
| 3. You are mistakenly overvaluing it
|
| If you don't have inside information, or have a unique reason
| why it is worth more to you than anyone else. Then 3 is far
| more likely than 2.
| grotorea wrote:
| Could you say this is "wisdom of the crowds" working
| against the bidder?
| User23 wrote:
| Overbidding has guaranteed downside. Underbidding has non-
| guaranteed upside. It's pretty clear that if you're playing
| an iterated game then you always underbid. Of course it's a
| different story if it's a unique item that you really want.
| [deleted]
| tomcam wrote:
| Methinks you just restated GP's points with slightly less
| clarity
| WalterBright wrote:
| It's just discounting one's bid by the amount of the
| perceived risk.
|
| For example, we discount the price of a used car by an
| estimate of how much of its useful life is used up. But
| that cannot be gauged precisely, hence risk.
|
| We discount the price even further if bought from an
| individual rather than a used car dealer, because the risk
| of hidden defects is higher.
|
| Risky investments are priced lower than more secure
| investments.
|
| Many people say that free markets require perfect
| information. They don't, not at all. The imperfect
| information is called "risk" and affects the price
| accordingly.
| tomcam wrote:
| Not surprisingly, your explanation is the most coherent
| of all of them
| WalterBright wrote:
| Another way risk is reduced by paying more is purchasing
| warranties and insurance.
| hgsgm wrote:
| No, that poster's #3 added the key insight.
| richdougherty wrote:
| I haven't read the article, but "The Winner's Curse" is an
| economics concept I'm familiar with.
|
| Basically, The Big Insight is that every bidder has an estimate
| of the value of something, and the true value might differ from
| these estimates. If you're the winner of a transaction then you
| have likely _overestimated_ the value. Since you had the
| highest estimate, you probably overestimated.
|
| But it only arises in certain situations. In practice, it
| depends on whether all bidders have the same information. If
| you have more information your estimate might be correct. It
| also depends on whether the item has different value to
| different bidders, as it might truly be more valuable to the
| winner.
|
| https://en.wikipedia.org/wiki/Winner%27s_curse
|
| > Savvy bidders will avoid the winner's curse by bid shading,
| or placing a bid that is below their ex ante estimation of the
| value of the item for sale--but equal to their ex post belief
| about the value of the item, given that they win the auction.
| The key point is that winning the auction is bad news about the
| value of the item for the winner. It means that he or she was
| the most optimistic and, if bidders are correct in their
| estimations on average, that too much was paid. Therefore savvy
| bidders revise their ex ante estimations downwards to take
| account of this effect.
| vikingerik wrote:
| You're not missing anything. This article is junk and says
| nothing that we don't already know about the winner's curse (or
| you can easily look up anywhere.) It's only a vehicle to sell
| reports via that popup.
| tomcam wrote:
| OTOH I can now use "Winner's Curse" as the name of my direct
| to video screenplay which will appear on Netflix starring
| that guy from the really good show a couple years back, and
| maybe with a Bruce Willis cameo
| pessimizer wrote:
| And now you can look it up in this article, written in
| different words and from the perspective of the individual
| participating in an auction. That's not junk.
| Zetice wrote:
| We? I didn't know this had a name or was formally recognized,
| and at best I had an intuition for it rather than an explicit
| understanding of what was going on.
|
| This article solidified the concept for me, and I'm grateful.
| Why so cynical?
| samtho wrote:
| > This article solidified the concept for me, and I'm
| grateful. Why so cynical?
|
| If it were not posted on HN you wouldn't have seen it, I'm
| guessing. As for the article itself, it is a surface-level,
| paraphrased encyclopedia entry on this observation. It
| could have provided more value with more than just a jar of
| coins as an anecdote, perhaps showing how this can apply in
| face-to-face negotiations.
|
| I think it's fair to be skeptical of intentions because of
| low-effort junk out there that exists solely as a lead gen.
| andsoitis wrote:
| It not only describes the issue it also provides some tools for
| decision making such as:
|
| a) widening one's aperture of what is an auction:
|
| _Auctions pervade our world, from mergers-and-acquisitions
| deals and procurement auctions to eBay._
|
| b) ideas to avoid the trap:
|
| - Analyze whether the asset has a common value element. A
| common value asset, like a jar of coins, has equal value to all
| bidders. If so, bid with caution.
|
| - Assess your capabilities and compare them with those of other
| bidders.
|
| - Before placing each bid, pause to consider how you would feel
| if you won the auction.
| m_coder wrote:
| I have settled on a strategy of bidding that seems to work when I
| am actively bidding (this goes only for little stuff not land and
| such). When I hope the other person bids, then I know I don't
| want the item at the stated price. I can feel intuitively that I
| will not want the item if I get it.
|
| Does anyone have a help for the opposite scenario? In this
| scenario I have not yet bid but the price is quite low and I
| don't want to bid in case I missed something. The price stays
| very low and the item is sold. I am left kicking myself for not
| sticking my neck out there and making a good deal. Maybe I should
| bid once and see if I like it. The problem is that one bid might
| get it...
| remote_phone wrote:
| I have extensive experience bidding on eBay auctions, I probably
| engaged in 10 auctions a month for several years in a row.
|
| The first few times I definitely encountered winners curse. But
| the real/only solution is having accurate price discovery and
| having a game plan. I will do research to find the current market
| value and bid in the bottom end of the range. If I miss it, the
| market is liquid enough such that I can try again and if i hit
| it, then I am happy because I got it for a low price.
|
| On items with lower liquidity and availability I still need to be
| patient and disciplined with my bidding. This is the only way to
| do online auction bidding.
|
| Oh and also sniping in the last 30 seconds.
| BeetleB wrote:
| > Oh and also sniping in the last 30 seconds.
|
| I really don't know why eBay hasn't "solved" this.
|
| In real world auctions, bidding continues until no one bids.
| This eliminates sniping as a tactic.
|
| My favorite auction site was ubid.com, which had this policy.
| There always needed to be a 5 minute period of no bids for the
| auction to end. This way, you can comfortably tell the
| automated system your max bid and not worry about snipers.
| PanopticonMan wrote:
| This is basically the adverse selection concept which is
| explained incredibly well in Agustin Lebron's book (ACX review -
| https://astralcodexten.substack.com/p/your-book-review-the-l...)
| but without as much depth or nuance.
|
| Price discovery in an auction is great for the market, not
| necessarily for the bidder with incomplete info. This article
| feels like a long intro to an article that never actually starts.
|
| NB: No offence to the author if you read this! Criticism is
| probably just because it was info I already knew.
| twothamendment wrote:
| I was hoping for more. I guess I watched, bid and lost enough
| eBay auctions to realize that people would bid up the price of a
| used item well beyond the price of buying it new on any number of
| retail sites. The thrill of winning was the only explanation I
| could come up with.
|
| eBay or whatever the "jar of coins" is, I try to figure out what
| it is worth to me before placing the first bid - and never go
| beyond that. If I fail to overpay, I'm OK.
| ghaff wrote:
| Back in the day, there was a certain exciting novelty to eBay,
| often for people who had little experience with auctions.
| People could also convince themselves that if everyone else
| thought something was worth more than they did, maybe they knew
| something--but most likely they didn't. So, yeah, the thrill of
| the hunt was certainly part of it.
| WalterBright wrote:
| I suspect some of those are shills.
|
| The problem with eBay auctions is the time limit. It pays to
| "snipe" them one second before the close. I realized this in
| the early days of eBay, and within a few months everybody knew
| it.
|
| eBay could fix this by not closing an auction if there are bids
| within the last 5 minutes, but they show no inclination to.
| mentos wrote:
| Thinking of the scene in Succession now 'Congratulations on
| saying the biggest number!'
|
| https://www.youtube.com/watch?v=1E_L87IJnw8
| rwmj wrote:
| Like the infamous UK 3G radio spectrum auction that both raised
| huge amounts of money for the Treasury and led to the winners
| suffering massive loses.
|
| http://www.gsmhistory.com/3g_auction/#3g%20auction
| onetimeuse92304 wrote:
| This is, unfortunately, more frequent problem than many people
| think.
|
| I have seen so many contracts in the corporate world where each
| side wants to get as much as they can for themselves. What they
| should be doing instead is figuring out how to make both sides of
| the contract happy. They should be thinking and answering "If
| this contract is signed, would both sides be happy and would it
| result in a lasting and successful relationship?"
|
| The best strategy is to price your services right, make sure the
| contract is adequately serving both sides and, ideally, that both
| sides will be getting something from it that will make them happy
| to continue the relationship.
| LordShredda wrote:
| I think this applies to more than just auctions. Bidding to take
| on a contract or a responsibility, that turns out to be more than
| what you expected. Or overselling yourself and going through
| great pains to reach a position with very few worthwhile
| benefits.
| ajonit wrote:
| On the topic of negotiations, I would recommend a book "Never
| Split the difference" by Chris Voss a former FBI hostage
| negotiator. He takes you through his own experience of handling
| various hostage situations, salary negotiations etc.
| mizzao wrote:
| I read all the classic negotiations books and think this one is
| the only one you need to read. IMO its core idea is NOT "how am
| I supposed to do that", as other posters say, but the role of
| empathy and uncovering hidden information in high-stakes (or
| even regular) negotiations
| BeetleB wrote:
| I recommend the book for the psychological/emotional tips.
|
| Otherwise, it's a pretty poor book:
|
| https://news.ycombinator.com/item?id=27335076
| jabroni_salad wrote:
| This book has created a whole class of very annoying people who
| do nothing but repeat "How can you make this deal better for me
| at no cost to myself" in an endless loop and have no strategy
| for what to do when the other party isn't willing to negotiate
| themselves downwards for free.
| WalterBright wrote:
| Both parties can employ that strategy, and there's no sale if
| they cannot agree. It's self-correcting.
|
| If you find it annoying behavior on the part of the other
| party, walk away.
| LVB wrote:
| I enjoyed the interview with him on Lex Fridman's podcast, too.
| Some repeat of the book, and some new material.
| unsupp0rted wrote:
| "How am I supposed to do that?"
|
| "Well, I've got these hostages here, so I suppose the 'how' is
| up to you."
| WalterBright wrote:
| People who take hostages aren't very smart, so being poor
| negotiators is par for the course.
| mizzao wrote:
| How do I know the hostages are alive?
| unsupp0rted wrote:
| What else can you do? Err on the side of all the hostages
| being dead?
|
| That'll make for some spicy firing + public disgrace + jail
| time if you're wrong.
| nicechianti wrote:
| [dead]
| wouldbecouldbe wrote:
| Opening a harvard site, having to close a popup with "No I dont
| want to win negations..."
|
| Then forcing popups.
|
| Seems like they went all in.
| 2ICofafireteam wrote:
| I have ZERO online bidding experience but have gone to a few in
| person (equipment, tools, livestock).
|
| Some advice I received from a general contractor applies to
| auctions: You never lose money on a contract you don't win.
|
| I've seen FOMO and pissing matches run up bids when simply
| putting a value on each lot you're after and sticking to it seems
| best.
|
| Leaving an auction empty handed only feels bad for a few minutes
| and is easier the next time.
|
| Once upon a time, at least in person, the auction house took
| there share out of the sale price (the buyer's share) but
| everyone where I am has charged it as a fee to the buyer for at
| least 15 years, so consider that when setting your number.
|
| Anecdotes:
|
| I've been in a bidding war, hit my number and stopped, had the
| exasperated Auctioneer try to goad me, and lost.
|
| I've witnessed unbridled enthusiasm make equipment sell for 80%
| of the cost to buy new.
|
| Once a bidding frenzy at a fur auction meant the price of
| squirrel pelts doubled and my colleague made $16K snaring
| squirrels that year. BTW: At least in the 90's, the People's
| Liberation Army was the biggest buyer of squirrel fur; I was told
| they were used to fringe hoods on winter jackets. That may have
| been as case of get the pelts no matter what.
| fakedang wrote:
| > At least in the 90's, the People's Liberation Army was the
| biggest buyer of squirrel fur; I was told they were used to dr
| hoods on winter jackets. That may have been as case of get the
| pelts no matter what.
|
| If Mao hadn't gone on his retarded crusade against squirrels,
| they wouldn't have had to do that lol.
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(page generated 2023-08-25 23:01 UTC)