Puzzle Hunt Credits
(Any omissions acci...
Probably worth including that the winner's curse will also tend to be a feature when the object to be bought is a one time, one customer type setting.
I don't think the winner's curse is limited to this; e.g., I think if the top five bidders win in an auction for vacation tickets (not knowing the value of the vacation package in advance), the effect still exists. It also doesn't need to be a one time thing, or a unique good.
...Or would you agree that under your view, the market clearing price of a Walrasian auctioneer the price is also too high in
In response to various comments, I've edited this post to change the title, clarify my fundamental thesis and some terminology choices, and provide explanations for each example. I apologize if this makes some of the existing comments confusing; for posterity, the original version is here.
The high level changes:
It seems like the more the EMH is true in a situation/amount of optimisation pressure applied the more you should expect to be disappointed with a trade.
Yes, this is exactly right—post #2 in the sequence is about what environmental factors increase or decrease the prevalence of adverse selection, and ways to improve trading (and everyday decision making) in light of it. Stay tuned :)
... I would also not be doing it nearly as badly as OP postulates I would. (Because I would be, say, a market-maker like Jane Street, which makes a lot of money off doing that sort of thing.)
I'm not sure I follow. Is the argument here that Jane Street is good enough at market-making that they are not vulnerable to adverse selection? i.e. that the dynamic in example #11 (Widgets stock) wouldn't apply to them?
The fact that you have to reach for exotic scenarios ... [such as] auctions by naive non-auction goers who don't even know to account for winner's curse or getting stuff for free should make you rethink what you are claiming about "most trades you make aren't all that great".
The thing I'm describing here is winner's curse—my point is that the winning bidder (in example #5) overpays relative to the true value, while the median bidder (in example #6) neither profits nor loses. (A bidder whose model is mistaken such that they substantially underbid also profi...
I don't claim here that all trades you get to do are bad. I claim that they're worse than they might naively seem without accounting for adverse selection, i.e. for the fact that your opportunity to get something depends on nobody else wanting it (as in the case of the subway seat or the parking spot) or somebody else actively wanting the other side of the trade (as in the case of the zero-sum bedroom selection or the juggling contest).
I'm surprised that these are exotic scenarios to you. I regularly take the subway. I might not be understanding the releva...
For context, this post was itself inspired by my party, and the events described are all only slightly embellished: https://partiful.com/e/yEpJqHYiOj1w0JHrNcFw
I'm running a quant trading bootcamp at Lighthaven (in Berkeley) Nov 6-10. This is my first time trying the extended weekend model; it starts Wednesday night so if you're local you only have to take off Thursday and Friday. You can register here, or check out the LessWrong event here.
The course covers the fundamentals of quant trading (markets, order books, auctions, risk and sizing, adverse selection, arbitrage, how quant trading firms make money). In terms of vibes, it's a cross between the Jane Street trading internship, Manifest, and summer-camp-style ... (read more)