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U.S. auction theory pioneers win Nobel Economics Prize

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UNITED States (U.S.) academics Paul Milgrom and Robert Wilson won the 2020 Nobel Economics yesterday for work on auctions hailed as benefiting buyers and sellers around the world of everything from fishing quotas to aircraft landing slots.

Among the insights of the two Stanford University economists is an explanation of how bidders seek to avoid the so-called “winner’s curse” of over-paying, and what happens when bidders gain a better understanding of their rivals’ sense of value.

“Auctions are everywhere and affect our everyday lives. This year’s Economic Sciences Laureates, Paul Milgrom and Robert Wilson, have improved auction theory and invented new auction formats, benefiting sellers, buyers and taxpayers around the world,” the Nobel Prize’s official website tweeted.

Milgrom and Wilson notably came up with formats for selling interrelated items simultaneously. In 1994, U.S. authorities used one of their auction designs to sell radio frequencies to telecom operators, a move since copied in other countries.

In a statement, Stanford, which with Milgrom and Wilson now counts 19 living Nobel laureates, said their design had been used worldwide to allocate over $100 billion of licences.

Wilson showed that rational bidders tend to place bids below their own best estimate of what he called the “common value” – that is, when the value of an item is deemed to be the same for everyone – for fear of paying too much.

Wilson showed that rational bidders tend to place bids below their own best estimate of what he called the “common value” – that is, when the value of an item is deemed to be the same for everyone – for fear of paying too much.

Milgrom complemented that with theories on “private values”, when the perceived value of something differs from bidder to bidder.

He demonstrated that an auction format will give the seller higher expected revenue when bidders learn more about each other’s estimated values during the bidding process.

Speaking to reporters by telephone, Wilson welcomed the “happy news” of the award and revealed that his own personal experience of auction participation was limited.

“Myself, I have never actively participated in an auction,” the 83-year-old Wilson said. “My wife points out that we bought skiboots on eBay – I guess that was an auction.”

Milgrom, 72, told Reuters that Wilson, who lives across the street from him in Stanford, California, came to knock on his door in the early morning hours to tell him of their shared award as his phone had been on silent mode to let him sleep.

Asked if was anything in his research applicable to helping bidders avoid the “winner’s curse”, he said: “(It) is mostly a matter of being aware of it, knowing how to adjust…You better be sure there’s a reason that you assigned a higher value than other bidders, so that it doesn’t just mean that you’ve overestimated what the thing is worth.”

Even with all the data available today, bidders are often paying for uncertainty, Milgrom said.

The 10-million-Swedish-crown ($1.14 million) economics prize is not one of the original five awards created in the 1895 will of industrialist and dynamite inventor Alfred Nobel, but was established by Sweden’s central bank and first awarded in 1969.

The Norwegian Nobel Committee plans to go ahead with an award ceremony, albeit in a reduced format due to the coronavirus pandemic, in Oslo on Dec. 10, the anniversary of the death of Alfred Nobel.

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