Investment Psychology - The Winner's Curse:

Have you ever had the opportunity to participate in or witness an auction?

If so, then you will relate to it much better! It sounds fun, but the outcome is also quite relevant.

Many statisticians, mathematicians, and successful investors have discovered and outlined a common sequence of scenarios that mostly occur in auctions. Let's try to provide you with an overview:

Bidders sitting in an auction and trying to repeatedly bid on an asset often get intimidated to continue bidding, even if the bidder stands to make no profit.

It goes without saying that, in this situation, the last bidder will acquire the asset, thus earning the title of "winner."

But has he really won? What do you think? The inference might be deeper than you estimate.

From art and painting auctions to jewelry auctions, real estate, and the stock market, this situation is evident everywhere, and you might see this scenario every time. This phenomenon can be clearly explained with a few appropriate examples in this article.

The "winner's curse" is quite striking in the investment field. Generally, novices tend to fall into this trap!Where is the vulnerability?

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Assuming the actual (real value) price of the asset is 1 million yuan, and if the final bidder demands the asset at a price of 2 million yuan, is he still referred to as the winning bidder?

Psychologically speaking, the overwhelming competitive environment in bidding causes bidders to demand entities at prices higher than the profit (allowable) threshold.

This overestimation of the final bid for an entity is actually the cause of the "winner's curse."

What triggers this curse?

They say: "Emotional stability in investing is a key factor."

You will see various collaborations among multinational corporations. In fact, the price at which a certain company's stock can be sold is very high, right? Well, the winner's curse is actually sometimes playing cards for it.

In fact, various multinational giants have fallen into this trap. Is it emotional friction or winning at all costs? I say both.

The human brain works in a very competitive way, and the reasons can be explored to the core of cognitive science. After a "successful bid," people begin to realize the losses they have suffered, but the dust has settled.

The price of an entity rises rapidly, followed by a contraction, which is the sequence followed by various financial experts. The strategy works when many people are attracted by the so-called "lower price" of the asset and ultimately pay for it.The Curse of the Stock Market Victors:

The curse of the victors is nothing new to the stock market. In the realm of stocks, you will observe various scenarios where people's investments are affected by the victor's curse. The best examples include:

1. Buying stocks at high prices.

In the stock market, you may occasionally encounter a narrative where people purchase expensive stocks because they do not want to miss out on opportunities. Here, they are willing to bid high prices to win that stock. However, buying overvalued stocks (just to make money) never benefits investors.

2. Investing in IPOs where insiders sell their shares while the public bids.

An IPO is the situation where a company issues shares to the public for the first time. During the initial public offering, promoters, families, early investors - angel investors, venture capitalists, and other insiders are selling their shares to the public.

But, do you really think insiders would sell their shares at a discount?

Regardless, to win, the public is prepared to bid high for that IPO (most of the time). However, after the IPO is allocated to the people, the curse of the victors comes into play.

The next time you make a significant investment, you might want to avoid this situation, right? Don't worry, you can try some preventative measures, take some steps in the "battle zone."Bidding considerations:

1. Analysis and research are two things to do before making significant investments: Similarly, knowing the true value of the asset you are bidding on is crucial before you make the purchase. Once you have the fundamental knowledge, you should know that you will be more committed to your actions.

The item you are bidding on must have a reasonable standard price. Understand it beforehand.

2. Draw the line: Leaving emotional thinking behind is the best thing you can do when bidding on assets, as emotions and financial conditions do not mix well. Once you start with the first bid, you should know where to draw the line. This will help you stick to your position in a better way.

3. Understand the importance of winning: When you are in a state of confusion, rational arguments are always better. Ask yourself, why is winning truly important to you?