The Winner’s Curse and Fool’s Gold
The original academic study of the winner’s curse analyzed government auctions of oil drilling rights. Oil companies would estimate the amount of oil in an oil field and use the estimate to bid on an oil field. But, estimating the value of oil in an unproven oil field prior to drilling is difficult and estimates vary.
Each oil company had different estimates of the oil in the ground – some higher and some lower. The firm with the highest estimate generally was willing to pay the most and submitted the highest bid. After the auction, it became obvious to the winner that the other oil companies thought there would be less oil in the ground – which was usually the case after drilling. The winner was cursed in that winner was unlikely to recover as much oil as the winner estimated.
Auction winners usually overestimated and overpaid. In searching for an affordable domain name, many people suffer from the winner’s curse. If you find what you think is a great name for $1,000, you always have to ask yourself if it’s a great name worth more than $1,000 or are you overestimating the value by not noticing a
problem with the name. There are occasionally great names for $1,000, but there are also many inferior names or fool’s gold names available for $1,000. The sections
on inferior domain names – domain names to avoid – cover domain names with problems.
In searching for a great domain name at a bargain price, you will have to brainstorm and estimate the value of dozens of domain names. If you make one mistake on one estimate and don’t catch the mistake, you could end up bidding for fool’s gold – and suffer the winner’s curse. The desire to finish the naming process and move on to your real business also leads to mistakes. “Let’s just take the name and move on.”
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