Overcoming the Winner's Curse: An Adaptive Learning Perspective

Abstract

Even though experience was found to improve decision-making in several tasks, there are instances in which learning is ineffective. The current paper studies one example of the last category, namely the persisting tendency of negotiators in bilateral bargaining under asymmetric information to ignore the decisions of their opponent(s), which can result in negative profits also known as the "winner's curse".

Bazerman and his colleagues studied this phenomenon extensively using a task known as the "Acquiring a Company" task. One surprising finding is that even experienced participants showed no adjustment to avoid the winner's curse.

The current study suggests that the observed persistence of sub-optimal behavior is largely due to the variability in the environment that leads to an ambiguous feedback. Since participants adjust their behavior adaptively, i.e., they condition their behavior on outcomes of the previous rounds, which have a high variance, it is difficult for them to overcome the winner's curse in this situation.

In a series of experiments using the "Acquiring a Company" task we decreased the variance in the payoff. We find that decreasing the variance improves performance, but it does not completely eliminate the winner's curse. However, even when participants were given explicit information about the expected profit of each bid, they still overbid, suggesting that the difficulty to learn to avoid the winner's curse can be partially attributed to the utility participants have from gambling. The results show the importance of giving negotiators noise-free feedback in order to improve negotiation skills.