winner's curse

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The danger that the winner of a contract will lose money on it. Where contracts are awarded by competitive tendering, the winner is usually the firm offering the lowest price. Estimates of costs (and revenues) are subject to error, and there is a danger that the winner will be a firm which has made a large underestimate of the true cost (or overestimate of revenue), and will thus lose money on the contract. The same argument applies in auctions when the winner pays the value of the highest bid.

Subjects: Psychology — Economics.

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