The “winner’s curse” in auction bidding. In auction bidding, the “winner’s curse” is the phenomenon of the winning (or highest) bid price being above the expected value of the item being auctioned. The Review of Economics and Statistics (Aug. 2001) published a study on whether experience in bidding affects the likelihood of the winner’s curse occurring. Two groups of bidders in a sealed-bid auction were compared: (1) superexperienced bidders and (2) less experienced bidders. In the superexperienced group, 29 of 189 winning bids were above the item’s expected value; in the less experienced group, 32 of 149 winning bids were above the item’s expected value.
a. Find an estimate of p1, the true proportion of superexperienced bidders who fall prey to the winner’s curse.
b. Find an estimate of p2, the true proportion of less experienced bidders who fall prey to the winner’s curse.
c. Construct a 90% confidence interval for p1 - p2.
d. Give a practical interpretation of the confidence interval you constructed in part c. Make a statement about whether experience in bidding affects the likelihood of the winner’s curse occurring.
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