Investopedia explains the empirical concept of a “winner’s curse” as “a tendency for the winning bid in an auction to exceed the intrinsic value of the item purchased. Because of incomplete information, emotions, or any other number of factors regarding the item being auctioned, bidders can have a difficult time determining the item’s intrinsic value.”

In auctions ranging from small items on eBay to billion-dollar stock market IPOs and eye-popping free agency signings in professional sports, the winning buyers are prone to overestimating intrinsic value. Bubbles in stocks, real estate, and commodities are fueled by bidding based on exaggerated ideas of expected value.

Several incidents of the winner’s curse in bloodstock auctions are legendary. While the most sensational examples are from multimillion dollar bidding for select yearlings and 2-year-olds, overpaying also frequently occurs in auctions for less fashionable bloodstock.

Buyers of weanling and yearling racehorse prospects are especially susceptible because it is difficult for even collaborating experts to determine intrinsic value. This derives from the extreme subjectivity of approximating future cash flows from the investment. While such considerations as a horse’s pedigree, conformation, and motion are used to make reasoned projections about racing ability, these are low-percentage predictors and they also do not measure intangibles like will to win.

Bid shaving is one popular counter-tactic to falling prey to the winner’s curse. A potential buyer works up a fact-based estimate of intrinsic value and then shaves or reduces this amount by a certain percentage. The more conservative figure becomes the maximum price he or she is willing to pay. Establishing a ceiling bid in advance and sticking to it is still the best way to mitigate the risks of getting caught up in the seductive whirl of an auction.

Copyright © 2013 The Blood-Horse. Used with permission.


  1. I was at a Saratoga yearling sale maybe ten years ago and saw a bidding war break out between a well-known breeder/owner and a TV syndicator. The bidding was clearly fueled by the competitiveness between the two. One guy even offered to be partners with the other and the reply was obscene. The Green Monkey bidding (about $16 million) and the bidding in 1984 or thereabouts at Keeneland for the Seattle Slew half-brother ($13 million plus) are historical glimpses at the winner’s curse. The same thing happens at high-end art auctions.

  2. The stock market exhibits this behavior often with people chasing returns, like right now.

  3. michael motion says

    SO !…………….what else is new ?

  4. You have provided some common sense for the neophyte buyer to think about that would serve well. Beware of emotion if you are at a sale with $5K or $500K.