Richard Thaler

He used to have bottles of wine that he had purchased 20 years earlier that had appreciated greatly in value.

So say he had bought a bottle for $10 that was now $300.

And he would drink one of those bottles occasionally.

But he would never buy a bottle at that price, nor would he sell one.

Now, why is that an anomaly?

Well, what does it cost him to drink one of those bottles?

It costs $300 because he could sell it to his retailer for $300.

But that's not the way people think about it.

So we have an anomaly.

And let's have another example, this one from the business world.

There's something that's called the winner's curse, this phenomenon.

And it was discovered not by economists or psychologists.

It was discovered by engineers at Atlantic Richfield Oil Company,

who learned that over time that the auctions they won for oil leases, there was less oil than they expected.

And then they finally figured out that's because the auctions that they win are not a random sample of their bids.

It's the ones they made high bids.

And the general rule is the more bidders there are, the more cautious you need to be.

Yeah.

If you have the high bidder, it's probably because you made a mistake.

So here's the winner's curse, the way that we demonstrate it to students.