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The Winner’s Curse, Olympics Edition…

April 21st, 2010 · 7 Comments
Behavioral Econ · Buyer Beware

If you aren’t en economist, you probably think that I am going to dive into a discussion about Olympic athletes who win gold either not being as successful in life as their silver medal counterparts or perhaps randomly getting struck by lightning or caught in avalanches or something. (“winner’s curse,” get it?) But no. In my world, NBC is the cursed winner:

The tally is in: NBC lost $223 million on the Winter Olympics in the first quarter.

Oops. Let’s look more closely- where did the profit shortfall come from?

The Olympics did bring about $800 million in extra revenue to GE. But NBC had a lot of production and other expenses, including $820 million just to acquire the rights to carry the Vancouver Games on television and online. That expense was cited as the main culprit for the red ink.

Oops. So did the extra revenue not cover the cost to acquire the rights because viewership (or rather projected viewership, and thus ad sales) was poor, or did NBC pay too much?

GE executives said the high-profile event had ratings that were 14 percent better than the 2006 Winter Olympics in Turin, Italy, for which NBC paid $613 million.

Oops. So from what I can tell, the conversation in the NBC conference room must have gone something like this: “Well, I’ll admit that the Torino games four years ago were a dud from a ratings perspective. But I’ve got a good feeling about Vancouver…I mean, it’s close to the US, people speak English there, TV has gotten so bad that it’s basically a choice between watching this or watching a Kardashian sister, so we really can’t lose. Let’s up our bid for the games coverage some 30 percent from what we ponied up in 2006, k?”

And you wonder why things went poorly for NBC. (Sidenote: I love how the articles that I found when searching for numbers were generally of the form “Vancouver: At least it’s not as bad as Torino. Oh wait, the ratings dipped below those of Torino. Oh, now they’re back up, thank goodness.”) But before we go laughing about how dumb NBC was, I would like to point out that this situation is not as uncommon and you would think, and it’s a great example of what economists refer to as the winner’s curse.

Consider the following situation: there’s an auction (more specifically, a sealed-bid auction, not the gavel and fast-talking dude kind) for a huge jar full of quarters. Or at least you think it’s full of quarters- you see something that looks like a jar full of quarters, but you can’t actually poke through the jar and make sure that the middle of the jar isn’t stuffed with beanie babies or something instead. (Ha. Remember the days when the beanie babies would have been worth more than the quarters?) Actually, you haven’t seen the jar of quarters itself so much as a picture of the jar full of quarters, so you’re not entirely sure how big the jar is in reality.

Luckily for you, you were told how much the jar weighs. Now, you’re not exactly sure what to do with this information- you could find out how much a quarter weighs and divide the weight of the jar by the weight of the quarter, but this doesn’t help if you if the jar has things other than quarters in it. Nonetheless, you feel good about this information because you think that no one else has it…but they could have information that you don’t have, or they could have a slight variation of the information that you have and be interpreting it in a different way. Ready to bid? =P

Not surprisingly, different bidders come up with different valuations of the item, since they have different information and interpret it in different ways. (The situation where an item has a more or less objective valuation but information needed to determine the item’s value is spread across bidders is known as a common-value auction.) So we get something akin to the following:

This is what economists are referring to when they talk about the winner’s curse. Granted, the bids don’t have to follow a nice normal distribution like I drew here, and they don’t have to be symmetric around the actual value of the item, but the fact remains that it is overwhelmingly likely that if the bidders bid their estimated valuation of the item, the winner of the auction will have bid more than the item is actually worth. Oops.

The bidders in these auctions aren’t completely naive in a lot of cases. If they are aware of this winner’s curse concept, their thought processes go something like this: “Well, if I bid my estimated valuation and I win, I will have overpaid for the item. Therefore, I am going to scale down my bid somewhat in order to try to avoid this problem. I might not win as a result, but better to not win than to overpay, despite what eBay might try to have us believe.” This mindset lessens the effect of the winner’s curse, but it doesn’t guarantee that it will go away entirely.

Now, back to NBC…basically, NBC was the bidder and the Olympics was the jar of quarters. There is a more or less objective valuation of the Olympics that becomes known after the rights are purchased. This value is the amount of revenue that the event generates for the holders of the rights. Granted, this valuation depends on how well the ad sales and whatnot are implemented, to some degree, so it’s not quite as fixed as in the quarters example, but the point still holds. Each network had its own interpretation of the available information, and perhaps even some private information, but no network has enough information to know for sure how much money the Olympic broadcast is going to bring in. NBC, apparently, was the network that had the rosiest outlook and/or didn’t scale down its bid enough to overcome the winner’s curse.

Oops.

Tags: Behavioral Econ · Buyer Beware

7 responses so far ↓

  • 1 A.J. // Apr 21, 2010 at 5:42 pm

    You can also go on to explain how no NFL fan is ever happy with any free-agent addition to their team, ever!

  • 2 Steve // Apr 21, 2010 at 8:56 pm

    sometimes, to stop bidders trying to avoid the winner’s curse, they award the auction to the highest bidder, but use the 2nd highest bid as the price. thus more likely closer to the true value.

  • 3 Dan L // Apr 21, 2010 at 9:41 pm

    I just randomly assumed that Summer and Winter was a package deal, and Summer is a lot more profitable. I guess NBC is just not so bright.

  • 4 Greg T // Apr 22, 2010 at 12:54 pm

    You fail to take into consideration that they bid on the games in 2003. Before Hulu, before YouTube, before the internet was a viable platform for distributing video content. The world that NBC has to distribute advertising to is completely different than in 2003. Also, did you know there was a recession during the time the olympics were shown? I didn’t read that anywhere in this.

    This is not a perfect example of a Winner’s Curse per se, because the bidders didn’t just push the winning value into the right tail of a fixed distribution, but rather the bidders were bidding in one distribution, and the actual value of olympic coverage followed a completely separate distribution.

  • 5 Nudge blog · The Winter’s, ahem, Winner’s Curse for NBC Sports? // Apr 29, 2010 at 7:49 pm

    […] this post from a few days ago, but Jodi Beggs sees the winner’s curse in NBC’s bid for the Winter Olympics. Now, back to […]

  • 6 econgirl // Apr 29, 2010 at 10:14 pm

    From the Nudge blog:

    “It’s worth adding that mega sporting events and award ceremonies are prized by television networks not simply to make money on ads, but to promote other shows, particularly new ones, on the network. This isn’t to say that the Winter Games weren’t a big financial loser for NBC, but the mathematics for calling it a winner’s curse wouldn’t be as simple as total Olympics revenue minus Olympics costs. It would be total Olympics revenue plus additional ad revenue from other network shows due to Olympics promotion minus total Olympics costs.”

    True…but the $223 million that NBC lost would be bought a lot of advertising elsewhere.

  • 7 leena // Oct 15, 2011 at 12:16 pm

    oh… nice… i like this….

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