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The Winner’s Curse: An Economic Anomaly

May 27, 2013 Leave a comment

My grandfather, William Campbell (1927-2013), played a large roll in theorizing the Winner’s Curse by applying physics equations to economics. The winner’s curse, in simplest terms, is the idea that the winner of a common value auction tends to overpay. Within competitive bidding, the winner’s chances of overbidding increase as the number of bidders, or consumers demanding the item, increases (Investor words).  Each bidder estimates a certain price; some overestimate and others underestimate. The one who overestimates usually wins, and therefore is “cursed” with an item that is not truly worth what he or she estimated for. Such a curse can occur in two similar, yet slightly different ways: the winning bid exceeds the value of the tract, so the firm loses money; or the value of the tract is less than the expert’s estimate so the winning firm is disappointed (Anomalies: The Winner’s Curse).

ImageWhile working for the Atlantic Richfield Company, otherwise known as Arco, my grandfather was summoned to his boss’s office and asked a simple question with a complex answer: how can we save money? After strenuous research and collaboration, the team of engineers and physicists discovered that competition within bidding creates an atmosphere that does not usually allow the winner to truly win. In order to understand such a concept, consider an auction of a piece of land that has five million barrels of oil beneath it. No one actually knows the value of the land; so, some engineers will overestimate the value of the property and others will undervalue it. Most likely, the company that overrated the property will be willing to pay more and thus win the auction. So, we can conclude that within “competitive bidding, the winner tends to be the player who most overestimates the true tract value” (Competitive Bidding in High-Risk Situations). The variable cost of oil does fluctuate as supply and demand increase and decrease, which creates even more risk in an already dicey oil business.

At the same time, the winner’s curse does not necessarily apply to an auction marketplace like eBay. The winner’s curse only applies to competitive lease sales, or an auction with limited supply and excess demand. Marketplaces like eBay and Craig’s List have more supply than demand, allowing consumers to search for the lowest possible price before purchasing an item; thus, producers compete and lower prices. The prices approach equilibrium. Within competitive bidding for a single item, the price cannot approach equilibrium because excess demand disallows such a balance.


Not so fast

By no means is the winner’s curse a bid strategy; it is a mere analysis on what not to do. However, three simple rules can be followed to avoid being that guy who enthusiastically wins an auction only to watch his property slowly diminish in value: the less information one has compared with what his opponents have, the lower he ought to bid; the more uncertain one is about his value estimate, the lower he ought to bid; and the more bidders (above three) that show up on a given parcel, the lower one should bid.


Money Causing Hazy Elections

February 28, 2013 Leave a comment

Photo Source: KCET

We are all aware of the massive deficit that spending habits and tax cuts has placed America in. The money that our President spent on his election in 2012 does not help his case in fixing our debt crisis. Through burning cash on his campaign, Obama spent nearly one billion dollars on his last election victory (NY Times).  Two billion total dollars were spent on an election while America spent 3.54 trillion and only received 2.45 trillion in 2011 (Budget Challenge). Though two billion dollars is less than one percent of a trillion, cutting these funds would do more than Obama has accomplished in spending cuts. The spendthrift qualities of a candidate cause me to question the already ambiguous character of a politician. The capitalistic approach of the American dream has tainted the democracy and morality of elections.

Since the Citizens United v. Federal Election Commission in 2010, Political Action Committees have become a way for candidates to bank off of big money corporations. The case declared “government may not keep corporations or unions from spending money to support or denounce individual candidates in elections.” PACs are developed “for the purpose of raising and spending money to elect and defeat candidates”. These PACs raise tremendous amounts of money that allow the wealthy to support their favorite candidate and help him or her gain a competitive edge. Many have questioned the power of money; including Ezra Klein when he claims the committees give “the rich too much sway” (News Week). Although the donation of money has been protected under the First Amendment, the Fourteenth Amendment can also argued as broken. In no way do the mega donations from the wealthy give the poor an equal right to express their opinion. Thus, elections are skewed to the preferences of only one group of people and are not necessarily democratic.

Photo Source: Cartoon Movement

Elections are no longer a competition of who has better leadership virtues, but rather who has more money. These prodigal habits seem necessary for victory considering 95% of House candidates who outspend their opponent win (Business Insider). However, the vulnerability of American voters allows campaigns to grow obsessed with outward appearance rather than inward character. At this point, morality of elections is at its ultimate low. Candidates now spend more time advertising themselves than actually creating a reliable plan. Once he or she is elected, there is not a well thought out plan that a representative can resort to. With money in elections, equivocation of politicians has hit its highest point and the running of the government has become even more unpredictable. Sen. Evan Bayh, a democratic Senator who has chosen to retire from politics, claims that candidates spend “90 percent of their time raising money, that’s time they’re not spending with constituents or with public policy experts” (News Week). The problem with money in elections is that the candidate who spends more time with his constituents and policy experts than his advertisement manager will not win the election. PACs cloud candidates who are morally true and exemplify those who are more publically involved.

Money in elections today has created an unfair balance for the rich candidate and voter. The burning of billions of dollars on elections while America is in debt yields an increasingly skewed playing field . An unlimited budget and a capitalistic economy do not add up to a leveled competition in today’s society. The inequitable advantage screams for change. As Americans, we must reduce susceptibility to advertisements and demand a policy that creates an equal, democratic, and ethical playing field in politics.

Categories: A3 Tags: , , ,

Gun Control: Obama’s Time to Act is Now

February 22, 2013 3 comments

Photo Source: News Daily

The two extremes in the gun control debate must find a middle way in order to assuage the heat of the debate. Following the mass murder in Newtown Connecticut, the debate has grown to be volatile. Since the massacre, President Obama has presented his rationale in supporting steps to more controlled gun policies. The President understands that complete gun control is impossible because the Constitution is nearly impenetrable. The second amendment states, “the right to keep and bear Arms shall not be infringed” (Amendment II). A bill that does not violate the second amendment and is still effective requires strenuous work in Congress. As of today, 2,033 people have been murdered by guns since The Newtown tragedy and certain liberal states are becoming impatient, while the republican states are becoming aggravated (Slate). For the President, the time to act on gun control policies is now.

With the majority of Colorado siding towards democratic policies, gun-control bills have already been passed. According to MinnPost, the Centennial State has “hosted to two of the worst gun massacres in recent years” and is now seeking action against guns. The Colorado House of Representatives passed four bills on February 28, 2013 that will limit gun ownership in Colorado: “ammunition magazines limited to 15 rounds; a requirement for background checks for all gun transactions; a requirement that gun purchasers pay for their own background checks; and a ban on concealed guns in stadiums and on college campuses” (MinnPost). The Senate, who is mostly democratic to a lesser degree than Colorado, has not yet voted upon these four policies. The President has proposed similar gun legislation in his State of the Union of “an assault weapons ban, background checks and restrictions on high-capacity ammunition magazines” (Fox News).  If passed, those on the side of gun control will have won a battle, but not necessarily the war. If one of the policies were to violate the constitution, federal law would trump state law and the policy would be declared impossible. While some states have leaned toward gun control, others are taking the exact opposite approach.

Missouri, a southern conservative state, has a few extremists who want to take action towards banning gun control protests. Though

Photo Source: NY Times

this law is practically assured denial, a “Missouri lawmaker is proposing to send colleagues to prison for introducing gun control legislation” (Fox News).  It is not the attempt of lawmaking that is important, but rather the point that Missouri will not tolerate gun control. In fact, every attempt to create a bill has an equal and opposite reaction. Missouri’s “Republican-led Legislature has taken a different approach — more guns, not less.” One Senate committee is even trying to broaden the gun laws by declaring the right to bear arms “unalienable.” The policy would reflect the Constitution’s Preamble, however would no make much sense. The founding fathers did not consider the right to bear arms unalienable. If they did, the second amendment would not be necessary. I do not think a law to extend the rights of gun owners would be beneficial to the morality of America. However, the increase in weaponry could alleviate the Federal deficit. A country that prioritizes its economy over its integrity is a country doomed for failure.

The President has laid out his plans for America’s gun legislation, now it is up to Congress to decide the extent of the power of a bill that is to be passed, or any at all. There will always be tension between those for and against guns, but the only fair way to act is to find a median that minimizes opposition. The two extremes’ propositions are practically impossible to pass in America today. Thus, the only resolution to such a complex problem is through negotiation and acceptance by both sides through warranting leeway for the greater good of the USA.

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