The winner’s curse is the tendency for the winning bid in an auction to exceed the intrinsic value or true value of an item.
The gap in auction and intrinsic value can usually be due to incomplete information, types of bidders, emotions, or a variety of other subjective factors.
Initially, the term “winner’s curse” was coined as a result of companies bidding for the right to drill oil wells offshore the Gulf of Mexico.
In the investment world, this term is often applied to initial public offerings (IPOs), but in general, the winner’s curse can occur in any market where auctions are held.
The difference between intrinsic and auction value is usually influenced by bidders.