The Winner's Curse - Oil Field Economics and Baseball

It's the middle of winter. Right now baseball General Managers (GMs) are hitting the phones talking to player agents, trying to sign the men they think will push them over the top next season. The fans enter the season with great expectations. Yet so many times the player thought to be a savior to the team ends up not being worth the money it took to sign him. Is it because free agents go lose their edge after signing their big-money contracts? Seeing as many of these guys were set for life before they switched teams, this explanation doesn't seem to work. To find the real answer, we have to drill for oil.

Back in the 1950s the players in the American petroleum industry turned their eyes to the Gulf of Mexico. With newer technology it was possible to drill offshore. So the race began and the oil companies bid for drilling rights and set up operations. There was only one problem. These offshore oil wells weren't turning a profit. Is drilling on the seabed harder than drilling on dry land? Sure, but that wasn't the difficulty. The real problem was the bidding process given the uncertainties in information available to the oil companies. This was explained in an article published in the Journal of Petroleum Technology titled "Competitive bidding in high risk situations," by Capen, Clapp and Campbell of the Atlantic Richfield Company (ARCO) in 1971. Here they coined the term "winner's curse."

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