The Frontal Cortex

The Red Sox and Behavioral Economics

Here’s a perfect example of The Winner’s Curse at work. From Bill Simmons, writing about the Boston Red Sox bid for Japanese pitching phenom Daisuke Matsuzaka:

My favorite part about their $51.1 million bid was that they originally wanted to bid $50 million, then they decided on $50.1 just in case someone else bid $50, then they decided that someone else might go through the same logic, so they upped it to $51.1 million … and then, nobody else bid more than $42 million. I thought that was hysterical. Listening to them recount the process was like hearing a hung-over buddy describing a 3 a.m. eBay bid from the night before.