Congratulations, you won. That's the bad news.

When lots of people bid on something that's worth the same to all of them, the person who wins is usually the one who guessed too high.

LOT 1A jar of pennies

In 1983 two researchers, Max Bazerman and William Samuelson, walked into microeconomics classes at Boston University with jars of coins and paper clips. Each jar was worth exactly $8.00: one held 800 pennies, another 160 nickels. The MBA students couldn't count the contents. They wrote down a guess, then placed a sealed bid. The highest bid won the jar and paid what they had bid.

Over 48 auctions with 419 students, something odd happened. On average the students underestimated the jars: the mean guess was just $5.13. Yet the average winning bid was $10.01. The winners lost about two dollars each, on a prize they had won fair and square.

Nobody was being reckless. The crowd as a whole was cautious. The trouble is who ends up holding the jar.

LOT 2The winner is whoever guessed highest

Every guess is the true value plus some error. Some people guess high, some low. If everyone bids roughly what they think the thing is worth, the auction does something ruthless: it picks out the single most optimistic guess in the room and hands them the prize.

So the winning bid isn't a sample of opinion. It's the extreme of a pile of noisy opinions. Even if the errors average out to zero, their maximum doesn't. That gap between the true value and the highest guess is the winner's curse.

Try it below. Each dot is one bidder's sealed estimate of a jar worth $8. You are the gold dot. Run an auction and see who wins, and by how much they overpay.

LOT 3More bidders, bigger curse

Slide the number of bidders from 3 up to 30 and the overpayment grows. With more people in the room, the most optimistic guess is further out in the tail. With 10 bidders whose guesses are off by about 25%, the highest estimate is typically around 38% above the truth. Rougher guesses make it worse too: the curse scales with how uncertain everyone is.

That flips a piece of common sense. You'd think more competition makes a win more impressive. In a common-value auction it makes a win more suspicious.

LOT 4Where it was discovered: under the sea

The name comes from the oil industry. In 1971 three engineers at Atlantic Richfield, Ed Capen, Robert Clapp and William Campbell, published a paper in the Journal of Petroleum Technology asking why companies kept earning disappointing returns on offshore leases in the Gulf of Mexico, year after year. Their answer: the oil under a tract is worth about the same to every company, but each company's geologists estimate it differently. The firm with the rosiest estimate bids highest, wins the tract, and discovers the rosy part was mostly error.

The same shape shows up wherever something has one underlying value that nobody can see clearly: radio spectrum licences, takeover battles for whole companies, publishers bidding for a book, or teams bidding for a free-agent player whose future performance is a guess for everyone.

It matters that the value is common. If you want a painting because it will hang over your sofa, your value is private; nobody else's opinion changes what it's worth to you, and winning tells you little. The curse bites when the prize is worth the same to all, and only your estimate differs.

LOT 5How not to win too much

The fix is called bid shading: bid below your own honest estimate, on purpose. Not because you think the item is worth less, but because you should ask what it's worth given that you won. Winning means your guess was the highest, and the highest guess is probably too high.

Use the gold slider in the auction room to find your sweet spot. Shave too little and you win often but lose money. Shave too much and you almost never win. Somewhere in between you win less often but actually make a profit. Notice that the right amount to shave goes up as you add bidders or make the guesses rougher, and down if your rivals start shading too.

The same logic is worth remembering at a house viewing with twenty other couples, or when a bidding war on eBay feels thrilling. If you beat everyone, pause for one second and ask: what did they all know that I didn't?