So what solutions exist to the winner's curse? Information and caution are two big factors. Improving technology allowed oil companies to get a better grasp on how much oil is in the ground. Obviously a company that had better information made smarter bids, and was less likely to overbid. After the winner's curse phenomenon became better understood, oil companies were more cautious and started bidding fractions of what they thought the drilling rights were worth in order to avoid the curse. If all of the oil companies were bidding .75 what they thought the true value of the drilling rights were worth, they were much less likely to be bitten. A higher-risk operator might be willing to bid .8 the estimated value, whereas a more conservative player might only bid .65. The problem that quickly surfaced is that newcomers to the industry often did not factor in the fractional weighting when making their bids. Well, these newcomers were often bitten by the winner's curse, and while the newcomers might have annoyed the older companies, in the long run it was mainly the newcomers that were hurt.
In baseball more information will also lead to a better bid. A team that understands statistics will probably realize that a certain slugger's gaudy RBI totals are due to his high-OBP table-setters, while a team that doesn't analyze the situation as well will drool over the RBIs and adjust their bid accordingly. A team that understands how aging affects performance is less likely to overbid for the thirty-five-year-old short stop. Caution also comes into play. A GM can estimate a player's value, discount it by a fraction as would an oil executive, and then bid accordingly. The problem is the newcomers. How often do we see a new owner come in and make a big splash in the free agent market? This is the case of the new oil company that hasn't figured out how the modified bidding works to fight against the winner's curse.
Be Sure to Continue to Page 5 of "The Winner's Curse - Oil Field Economics and Baseball".
