Reinterpreting the winner’s curse: A social constructionist perspective

This study reinterprets the well-documented phenomenon known as “the winner’s curse,” whereby competitive bidding behavior results in suboptimal financial performance in competitive market contexts. This ubiquitous phenomenon, observed across various fields of study (economics, finance, and management), methodologies (laboratory and field) and contexts (corporate acquisitions, capacity expansion decisions, financial and labor activities), remains a puzzle due to its apparent decision-making irrationality; indeed, it has traditionally been considered in terms of psychological biases. We suggest, however, that an answer to the puzzle of the winner’s curse lies in social forces heretofore not considered. Specifically, we advance an original theoretical perspective that analyzes how the winner’s curse is socially constructed, whereby ritualized social ceremonies create status contests whose outcomes prove economically costly to the social winners. We theorize and test our perspective using a unique, decade-long dataset with repeated competitive market interactions among firms in the U.S. construction industry, and we find supportive evidence showing that firms’ participation in bidding ceremonies generates higher status and diminished economic performance. We discuss the implications of our theoretical and empirical analysis for the winner’s curse literature, as well as the burgeoning research on the powerful influence of social forces on competitive market behaviors and outcomes.