So, as January nearly comes to an end, I have found my new year resolution – I resolve to blog at least once a week more frequently this year. As you will notice, my previous blogging attempts have come in spurts interspersed by long periods of hibernation. I’ve decided to set the record straight, partly due to peer pressure (some of my friends, Kevin,Andrew, Ali, Dan and Rohit are extremely prolific bloggers) but mostly because of selfish reasons – blogging crystallizes my own random observations into more random theorizing about how the world works. Or doesn’t.
To kick things off, I’m going to write about this week’s player auction in the IPL. For the uninitiated and Americans, that’s the Indian Premier League, the biggest, bestest sporting extravaganza on the planet. Okay, I exaggerate. It is a professional cricket league started in India in 2008 which revolutionized the sport from being a somewhat indulgent, five day (Test Matches) or eight-hour affair (One-Day Cricket) to a glitzy three hour entertainment package, with city based franchises owned by corporate honchos and Bollywood stars.
Much ink and cyberspace has been devoted to dissecting the IPL’s commercializing, corrupting effect on cricket. That is NOT the subject of this post. What struck me this year was the auction for players, specifically Kieron Pollard. Now, the way this year’s auction was set up, all teams were allowed to spend a maximum of $750,000 to buy players. If they spent it all on a single player and more than one team bid their maximum for that player, there would be a tie breaker. The tie breaker would be a single-price, sealed bid auction, where teams would write their secret bids on a sheet of paper. The highest bid would win the player and the amount would remain undisclosed. The above scenario played out for Pollard, who was then snapped up by Mumbai.
Now, the question which immediately comes to mind is, why keep the final bid amount ($750,000 + X) secret? My guess is a phenomenon known as winner’s curse. Winner’s curse is the idea that in auctions like the single-price, sealed bid auction and the English auction, the winner ends up paying more than the actual value of the asset. Essentially, the asset has the same value for all teams, but their estimates are different, because of uncertainty about the value of the asset. This uncertainty leads to different bids, but the highest bid is always higher than the common value of the asset.
I believe Kieron Pollard is a winner’s curse for Mumbai. And the uncertainty around his value wasn’t because any team had privileged information about him, but because they had so little information about him. This is a man who has played 20 international innings (ODIs and T20s combined) and faced 235 balls in total. To give you some perspective, that’s 1% of the number of balls Sachin Tendulkar has faced, and Sachin's “icon value” to Mumbai was $1.035 million. All that Pollard had going for him was one explosive 18 ball 54 in the T20 Champions League in October 2009. Incidentally, that match was played in India, which raises an interesting point about the disproportionate value of good performances in India for foreign players.
If this post leads you to think winner’s curse is a just an academic curiosity which has no real insight for the real world, think again. After the grand financial collapse in the US in 2008, the Treasury’s “Bank Plan” was to auction toxic assets to private investors, and get them off banks’ books. Of course, the problem was private investors did not know what the toxic assets were worth and were likely to suffer the winners’ curse if they made the winning bid. And that is why the Administration had to offer to subsidize the purchases.
Mumbai had no such subsidies. And that’s why I think they will regret winning the bid for Pollard.
3 comments:
Applying theoretical principles to very real world instances: I like it!
Now, from my unprivileged position outside of UC, I have a question about the winner's curse. Isn't there a huge assumption underlying this theory; namely, that the asset has the same value for all agents in a particular market? Doesn't the idea that value can't be variable go against the very foundations of the market?
This sounds more like Plato's ideal forms than a real world theory.
Kev, you're bang on about the theory's key assumption. But it doesn't challenge market rules precisely because the asset's common value is a market value!
So, if you were to auction a jar of pennies, their market value is a jar of pennies! Bidders may not know that value because they estimate from the jar's size etc but they can't turn around and sell it for more. The fundamental problem is uncertainty about common value.
Unless of course, someone is a collector of pennies. And that is explicitly assumed away by the theory (no private value). Perhaps I should have stated that!
I havent been following cricket (surprising, i know) and had no prior info about pollard. All I knew was his relatively young age and the hype surrounding the guy which when combined made him seem like a sachin-esque figure. Thanks for shedding some much needed light on his short cricket playing history.
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