An economics professor explains how the psychology behind bidding on things for investment reasons tends to limit the amount of the high bid.
Google intends to sell shares of itself through an auction in which Google stock is sold to those willing to pay the most per share. This means, for example, that if only 20% of the bidders end up with Google stock, these 20% will consist of people who bid the most for Google. Now, if you end up being one of these "lucky" 20% should you worry that the winner's curse has stricken you since you apparently valued the stock at an amount greater than what most investors believed Google to be worth?
Rational investors will take the winner's curse into account when making a bid. For example, assume that before the auction you think a share of Google is worth $100. But you figure that if you end up being a winner in the auction it means that most investors think Google is worth less than $100. So, the act of winning will cause you to think Google is worth only $80 a share. You should, therefore, bid no higher than $80, an amount diminished by the winner's curse.
