23

Institutional Background

TABLE 2.1
Deal

The Winners Curse

Buyer 1

Buyer 2

Auction P&L

Actual
Value

Sellers
Offer

Bid

P&L

Bid

P&L

Buyer 1

Buyer 2

1.56

2.10

2.00

0.00

2.40

0.69

0.00

0.84

2.66

1.40

1.50

1.21

1.80

1.06

0.00

0.86

3.16

3.20

2.10

0.00

3.10

0.00

0.00

0.06

1.96

3.40

1.60

0.00

2.20

0.00

0.00

0.24

1.36

1.90

1.70

0.00

1.20

0.00

0.34

0.00

4.46

4.30

4.80

0.09

3.00

0.00

0.34

0.00

3.16

2.60

3.50

0.11

2.90

0.41

0.34

0.00

1.96

1.80

1.40

0.00

2.10

0.01

0.00

0.14

1.56

2.70

1.40

0.00

1.10

0.00

0.16

0.00

10

2.16

2.10

2.50

0.14

2.70

0.24

0.00

0.54

Average

2.40

2.55

2.25

0.55

0.86

0.84

Total
Correlation
with actual
value

2.25
1.09

63.2%

83.3%

72.2%

Notes
The column headed Actual Value shows what the deals are really worth.
The columns headed Buyer 1 Bid and Buyer 2 Bid are the bid price of buyers of
deals.
The sellers asking prices, in the column headed Sellers Offer, are conservative
(higher by .15 on average than true prices).
The buyers are posting conservative bids (lower by .15 on average than true prices).
The columns headed Buyer 1 P&L and Buyer 2 P&L are the buyers profits if they
negotiate to the average of the sellers asked and buyers bid.
The columns headed Auction P&L Buyer 1 and Auction P&L Buyer 2 show the
profits of the buyers in an auction.

There are 10 transactions that the seller might sell to the buyers.
Neither the buyers nor the seller is certain of the true value of these transactions (for example, they might depend on future dynamic hedging costs,
which depend on the evolution of future prices, which different firms estimate using different probability distributions). After the fact, we know
the true realized value of each transaction, as shown in column 2 of the