

Bitcoin’s Winner’s Curse – What Auction Theory Teaches Us About Bubbles - vgordon
http://bigdatasc.wordpress.com/2013/05/15/bitcoins-winners-curse-what-auction-theory-teaches-us-about-bubbles/

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gibybo
Bitcoins are not sold at auction, they are traded like stocks, commodities,
and currencies.

You have people making offers to buy and people making offers to sell. You're
free to take someone else's offer or make your own. The biggest difference is
probably that there are many many transactions for the same item occuring.
When people are overpaying for auctions, it's because there is only one
auction so only the highest bidder gets it. With Bitcoin (or stocks, or gold,
or oil, or corn), people that didn't want to pay a particular price can wait
for someone else to make a better offer and buy it later.

To take his jar of coins analogy, you would first have to create many jars
with the same number/value of coins inside. Since no central entity creates
Bitcoins, lets say the jars are distributed among a few hundred different
people. When someone wants to sell one, he doesn't get the luxury of asking
everyone else to make a bid - he has to compete with everyone else who wants
to sell their jars. The buyers will line up in order of the price they are
willing to pay, and the sellers in order of the price they are willing to
take. Where they meet will be the price the market has discovered. There is no
reason to believe that price would tend to be higher (or lower) than the real
value of the jar based on auction theory.

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vgordon
Exchanges are the same as auctions in the sense that the person that is buying
the item is the one who bid the highest price. There is a reason why the
buying prices is called a bid.

Auctions are not limited to a single item, radio frequencies and bus routes
are just few of the examples that are sold in multiple item auctions. There is
nothing special about the number one in auction rather than a single item is
limited in supply, but in most cases two items can be of limited supply as
well and even millions. Good example for that can be engineers. Even though
there are many of them, their supply according to many is still limited, which
causes their salaries to rise.

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gibybo
>Exchanges are the same as auctions in the sense that the person that is
buying the item is the one who bid the highest price. There is a reason why
the buying prices is called a bid.

No, because then I could say "exchanges are the same as auctions in the sense
that the person that is selling the item is the one who is willing to offer
the cheapest price". This would imply exchanges tend to produce a price lower
than the actual value of the item. Of course that isn't the case because
unlike auctions, exchanges are balanced.

It's not just that it is only one item, it's that in your examples there is
only one seller. In exchanges, there are many sellers selling identical items.

Do you really think Bitcoins are sold more like radio frequencies and bus
routes than oil/gold/corn/stocks?

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warrenmiller
“Winner’s Curse" would indicts the game/race is over. It's only begun.

