The winner’s curse

I spent a brief but highly enlightening time working on Wall Street, first providing support to the foreign exchange trading desk at Bankers Trust (the biggest private US dealer in the biggest market in the world) and then at First Boston, a premiere investment bank then at the top of its game.

One of the things I learned about which has stuck with me ever since is the idea of the “winner’s curse.”

It sounds like a contradiction in terms, doesn’t it? How can a winner be cursed? Simple.

When he or she pays too high a price for what he gets.

This happens often in auctions. In fact, the phrase was coined in the 1970s after the US government put up offshore oil leases for sale at auction. In almost every case, the “winners” were the companies that miscalculated and paid far more than the leases were worth. As Financial Times commentator John Kay recently recalled, the “winners” were the companies whose geologists had screwed up.

When you’re at the foot of the mountain looking up, it’s easy to be carried away with winning, and winning at any cost but – as the 1970s gas and oil lease auctions and the dotcom bubble thirty years later showed – you can win the battle and lose the war.

Internet marketers often fall prey to the winner’s curse. I know I have. You see a course or a vendor who promises the moon. The goods come with a correspondingly sky high price tag. Not having the necessary background to make a proper decision, you plunge in, hoping for the best.

I’m all for optimism, but unquestioned optimisim is not a good trait if your goal is longevity. To use poker as an analogy, you could be “optimistic” and go “all in” on every hand. It’s exciting. It feels good…until the cards are turned over and you learn that you’re “all out.”

So how do you protect yourself from run-away optimism and the winner’s curse?

Here’s a three part formula based on three simple questions which I’ve found extremely useful. It’s by no means fool proof, but it will definitely help make sure you get the most out of your time, energy, money and morale…important assets that we all must husband carefully and none of us has an infinite supply of.

The three questions:

1. What’s the prize?

(If I win at this thing, what exactly will I get?) You’d be amazed by people who’ve involved themselves in a frenzy of activity and expense who cannot clearly asnwer this question.

2. What’s the cost?

(In dollars, in time, in emotional energy, in sacrifice, and every other factor you can think of) Again, a suprising number of people don’t count the total costs of various activities they’re involved in – or they undercount them.

3. Is it worth it?

(If I pay the price and get the prize, did I get a good deal?) It should be obvious, not only that #3 is the million dollar question, but that question #3 can’t be answered with nailing down answers to #1 and #2. Therefore, if you can’t clearly answer Questions #1 and #2, plunging ahead is into any purchase or venture is a gamble at best.

Is it OK to gamble? Sure, but look at what you’re doing for what it is and realize the long (and short) terms costs.

– Ken McCarthy

P.S. For over 25 years I’ve been sharing the simple but powerful things that matter in business with my clients.

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