Over at Managerial Econ, Luke Froeb highlights a nice example of the winner’s curse. Like Google, Yahoo uses automated auctions to sell ads. One wrinkle is that some advertisers prefer to pay for impressions, some prefer to pay for clicks, and some prefer to pay only for resulting sales. Yahoo thus needs some mechanism to put these different payment approaches on a comparable footing:
To choose the highest-valued bidder, Yahoo develops predictors of how many clicks and sales result from each impression. For example, if one click occurs for every ten impressions, an advertiser would have to bid more than 10 times as high for a click as for an impression in order to win the auction.
Yahoo was very proud of its predictors, but was puzzled that they systematically over-predicted the actual number of clicks or sales after the auctions closed.
This is the winner’s curse in action. As auction guru (and Yahoo VP) Preston McAfee explains in the paper Luke cites:
In a standard auction context, the winner’s curse states that the bidder who over-estimates the value of an item is more likely to win the bidding, and thus that the winner will typically be a bidder who over-estimated the value of the item, even if every bidder estimates in an unbiased fashion. The winner’s curse arises because the auction selects in a biased manner, favoring high estimates. In the advertising setting, however, it is not the bidders who are over-estimating the value. Instead, the auction will tend to favor the bidder whose click probability is overestimated, even if the click probability was estimated in an unbiased fashion.
McAfee then goes on to explain how Yahoo overcame this self-inflicted winner’s curse, and other strategies to improve auction performance.
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Posted in Auctions, Finance, tagged Auctions, Banks, TARP on December 4, 2009 |
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Yesterday the Treasury auctioned off its TARP warrants in Capital One. Treasury sold the warrants for $11.75 a piece, well above its $7.50 reserve price, but below some private estimates of $19.00 or more. I wouldn’t have gone as high as $19.00 myself, but I would have ended up a winner in the auction if I had found a broker with access. Oh well, maybe I can pick some up when they start trading on the NYSE (ticker COF WS) in the next week or two.
Disclosure: I have no position in any Capital One securities.
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Thursday is a nice milestone in TARP’s history: with the help of Deutsche Bank, Treasury is auctioning off the warrants it received when it invested in Capital One. The company has already paid off the preferred stock that the government purchased last fall, and will now be free from TARP oversight once the warrants are in private hands. Or, perhaps, in its own hands. Although Capital One declined to purchase the warrants from Treasury at a negotiated price (as had other firms that repaid the government’s TARP investments), it can still bid in the auction.
A few months ago, I pointed out many benefits from auctioning the warrants rather than selling them back to the companies at negotiated prices. To my mind, the biggest benefits are transparency and the fairness of market pricing. Everyone—including, at least in principle, small investors—can bid in the auction.
If you are interested, here’s the prospectus, which includes (pp. S-15 to S-16) a list of participating brokers. I don’t see my broker on the list, which is disappointing, but maybe others will be luckier.
For a nice discussion of the auction mechanism (a modified Dutch auction in which all winning bidders pay the market-clearing price, very similar to the method used to sell Treasury bonds) and some estimates of the warrant values, see this Seeking Alpha piece by Linus Wilson.
Disclosure: I have no position in Capital One and, apparently, no way to bid on the warrants. If I find a way, I might do it for fun.
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Am I the only one who feels unfulfilled by the standard distinction between positive and normative economics?
I am gearing up to return to the classroom next week, to teach microeconomics to incoming masters students at the Georgetown Public Policy Institute. Anyone who’s experienced the first day of micro class knows what’s coming. After introducing myself and talking about the wonders of economics (which is, indeed, fun, useful, and enlightening), I will launch into the great positive vs. normative distinction.
- Positive is the science side of economics: understanding and predicting the behavior of individuals, firms, markets, economies, etc. In short, the part of economics in which we try to be physicists (or, sometimes, biologists).
- Normative is the side of economics where we make value judgments, identifying policies as good or bad. In short, the part of economics in which we try to be philosopher-kings.
Both styles of economics are important, particularly in a public policy program. And drawing a careful distinction is vital, not least because of the many people in Washington (both economists and non-economists) who try to dress up their value judgments as science.
I have one problem with this distinction, however: it overlooks a great deal of what economists actually do.
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