What is the ‘winner’s curse’?

Picture a bidding for a fine Vincent Van Gogh painting. Paddles fly up one after another, numbers called out, each getting higher and higher. And finally, after a brief pause — the highest number gets called. Going once, going twice, and finally, SOLD! A roar of applause erupts. But that all fades too quickly when realisation hits — the price paid may be far more than the prize was ever worth.

This is what we call the winner’s curse: a phenomenon where the winning bidder ends up overpaying for the prize. In the long run, this win becomes a loss. A major financial loss.