Image Credit: Ricard Masferrer
For most of us, negotiating is all about winning. That’s the goal. When we are negotiating we have a set of goals that we are trying to use our negotiation styles and negotiating techniques to achieve and if we are able to achieve them, then we believe that we will feel as though we have been successful. Where things can get a bit strange is if we are successful in a negotiation, but we end up feeling as though we actually were not successful. What’s going on here?
The Winner’s Curse
The winner’s curse is something that shows up when you are engaged in competitive bidding. What the winner’s curse describes is a common problem in negotiation: lacking an advanced understanding of this phenomenon, the party who wins an auction of a commodity of uncertain value with a fair number of bidders typically pays more than the asset is actually worth. Does this sound familiar?
Today auctions pervade our world, from mergers-and-acquisitions deals and procurement auctions to eBay. To avoid becoming the next victim of the winner’s curse, what you need to do is to follow these three guidelines. First, you need to analyze whether the asset has a common value element. A common value asset, like a house, has equal value to all bidders. If so, you need to bid with caution. Secondly, take time to assess your capabilities and compare them with those of other bidders. Finally, before you place each bid, pause to consider how you would feel if you won the auction.
The problem is that too many winners of auctions end up feeling cursed by their victories. Remember when you are in your next competitive bidding negotiation scenario that winning isn’t always the most optimal, or value-creating option on the negotiation table. What you need to do is to evaluate your BATNA in a competitive bidding negotiation just as you would in a regular bargaining scenario – if your best alternative to winning the auction is to not win the auction, then tailor your bidding accordingly to head off the “need to succeed” at all costs.
Avoiding The Winner’s Curse
It is the nature of negotiating that we have all been in situations in which we are pitted against others in competition for a certain item, whether an award, a promotion, or even in an auction. When we are in this competitive atmosphere we are pushed to ‘play’ harder than we normally would, overvaluing the objective and over-assessing the importance of victory. The problem is that often when a group of people are vying for the same thing, the winner of the auction is revealed to have been overly optimistic about the value of the objective and thus is a victim of the “winner’s curse”, and they ended up paying more than the asset is actually worth.
If we want to avoid having the winner’s curse happen to us, then we need to first, determine the type of asset being auctioned, namely whether it is a “private-value” asset or a “common-value” asset. When we are going after a “private-value” asset we need to realize that they offer unique value to different bidders based upon their individual utilization of that asset. “Common-value” assets are ones that have equal value to all bidders, or, in other words, its utility to each actor “would provide equal value to all of them.” If the asset is exclusively a private-value asset then you need not worry about the “winner’s curse.” Often, however, the asset is a hybrid of the two, forcing you to assess which of the two values is most useful or important.
Secondly, along with determining whether an asset is private or common-value, the savvy bidder should try to determine if you have an edge over other bidders in utilizing the asset. One way to look at this is as being a winner’s dilemma more than a curse because you have to wonder why the other bidders didn’t want what you won. In order to overcome this obstacle you need to accurately assess your comparative advantage over other bidders in the utilization of an asset, or the unique knowledge, capabilities or resources that you might bring to an auction.
What All Of This Means For You
The reason that we negotiate is because we want something. If we are able to reach a deal with the other side and get what we were trying to obtain, then there is a good chance that we will feel as though we have won. However, especially if we are involved in a principled negotiation that involves bidding, there is the very real possibility that even if we win we may feel as though we really didn’t get the deal that we were trying for.
What’s going on here is a phenomenon called “the winner’s curse”. What’s happening is actually fairly simple: when we win an auction of a commodity of uncertain value with a fair number of bidders we typically pay more than the asset is actually worth. What we need to realize is that winning isn’t always the most optimal, or value-creating option. When we find ourselves in a situation where a group of people are vying for the same thing, we need to understand that the winner of the auction may have been overly optimistic about the value of the objective. To avoid this, we need to determine if we are going after a private value or a common value asset. Private value assets can’t be overpaid for – common value assets can. We need to determine if we have an edge over other bidders.
When we are successful in a negotiation, we want to make sure that we don’t end up regretting our success. If we aren’t careful, then after coming out of our next negotiation with the deal that we wanted, we may feel as though we were not successful. Take the time to carefully evaluate what you are going for and make sure that what you are willing to spend to get it matches what its true value is.
– Dr. Jim Anderson
Blue Elephant Consulting –
Your Source For Real World Negotiating Skills™
Question For You: When you are bidding on something in a negotiation, what is the best way to continually remind yourself what the true value of the item is?
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What We’ll Be Talking About Next Time
When we sit down at the negotiating table, what do we really know about the other side? Generally not that much. We may have done some homework and we know their history and who they are currently working for. However, we may not know what they want to get out of the negotiation that they are involved in right now. If we want to learn more about where the other side is coming from, then we need to be able to interpret what they are trying to tell us during the negotiations. This means that we need to understand their body language.