The Winner’s Curse: Behavioral Economics Anomalies – Then and Now by Richard Thaler and Alex Imas
is a revision of Thaler’s original work from 1992. Here you will learn about the many anomalies in human thinking that have personal economic impact. By understanding these anomalies, you can better maximize your wealth.
Preface
- The book builds on the work Richard has done since the original “The Winner’s Curse” was published in 1992. He gives Alex no credit for the original work as Alex was in grade school at the time. Together, they have rewritten the original work and added anomalies that have been discovered and reproduced since 1992. To avoid making the book too long, they left out some anomalies they felt had lesser broad interest. You can, however, read the papers on those subjects at thewinnerscurse.org.
1. The Winner’s Curse
- The origin of The Winner’s Curse came when oil companies participating in auctions to drill on federal lands found that the winner found less oil than expected. The winner of the auction was a loser in financial terms. This idea extends to any auction where there are lots of bidders as someone will almost always bid too high. The lesson is to become more conservative as the size of the group you are bidding against increases.
- This concept also applies to Major League Baseball where the team that pays the most for a free agent usually finds that he underperforms. Successful buyers of smaller companies usually find little or no gain for the buyer. Early picks in the NFL draft are often bad deals as the teams who pick top choices have to pay them more, while teams with lower picks often find hidden gems. Tom Brady, for example, was taken with the 199th pick.
- Each chapter ends with a “conclusion so far,” and “an update” from the original work. There is also a bottom line summary.
2. Cooperation
- We should be happy that cooperation in general is common in our country. Factors sited are that most people voluntarily return lost wallets, pick up after their dog, and make charitable contributions. Many people do nice things for others without expecting anything in return because it makes them feel good. (Doug: I’m one of those. Try it if you haven’t.) There is a tit-for-tat aspect to cooperation in that when cooperation isn’t returned, the person who was initially cooperating is likely to stop.
- One of the key pieces for research sited in this chapter uses the prisoner’s dilemma. Click here to find out what it is.
3. The Ultimate Game
- The big idea is that people are willing to sacrifice some of their own money to punish actions that they think are unfair. No one likes free riders and everyone likes to be treated fairly. Those who violate these social norms may be punished. Try being nice; it will make you feel good about yourself and might even increase your monetary rewards. The authors, and many other researchers, refer to The Ultimatum Game as a basis for the research that produced these findings.
4. The Endowment Effect, Loss Aversion, and Status Quo Bias
- If you demand more to sell an object than you are willing to pay for it, you are experiencing the endowment effect. This qualifies as and anomaly as you value something more if you have it than you do if you do not have it. Hanging on to something that you could sell at a profit is the status quo bias. Dealers who are used to buying and selling don’t seem to be impacted by either.
- Finely, there is loss aversion. This is where losses hurt more than equivalent gains feel good. Even though they are experienced, professional golfers try harder to make par putts than birdie putts. They seem to feel that losing out on making par hurts more than making a birdie feels good.
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