The winner of an auction for a commodity with unknown value will most likely be the bidder who has the highest estimated value of the good. Typically, the winner overestimates the value and then overpays in the auction. Bidders need to significantly shade their bids to ensure that if they are the highest estimator of value, they do not overpay.
The March Madness in the Classroom exercise was conducted at Mount Saint Mary’s University in Emmitsburg, Maryland. In both auctions (a first-price sealed bid and an open outcry) the winner’s curse was present. In the open outcry auction, bids totaled $3,939,150 while the total payout was only $1,290,000. Only five out of twenty-one students made a profit. The students shaded their bids to some extent in the sealed bid auction, but the bids still totaled $2,511,219. Only four students in the sealed bid auction made a profit.