In 1971, three engineers from the Atlantic Richfield oil company—Capen, Clapp, and Campbell—published an observation explaining why their industry systematically lost money at drilling rights auctions. Tracts were sold to the highest bidder. No one knew the actual oil reserves—each company made its own estimate. And these estimates diverged: some considered the tract poor, others rich.
The key takeaway turned out to be unpleasant. If the participants' estimates are scattered around the true value, the winner is not the one who estimated most accurately, but the one whose estimate proved to be the most inflated. Winning the auction is in itself a signal that you were more mistaken than everyone else. The authors called this the winner's curse.
The logic works wherever there is competition for an object with an unknown exact value and the evaluation is made blindly. Hiring is precisely such a case.
A candidate's actual future effectiveness is unknown to anyone. Each employer builds their own guess based on resumes, interviews, and impressions. The guesses diverge. The candidate goes to whoever offered more—that is, to the one who valued them higher than all other market participants.
From here follows what is rarely considered at the moment of closing a vacancy. If five companies were evaluating the same person and you outbid everyone, the most likely explanation is not that the other four missed something. The most likely explanation is that your estimate turned out to be the outlier in the distribution.
This does not mean that one should not fight for strong people. It means that the fact of winning a competitive struggle is not a confirmation of the correctness of the decision—even though psychologically it feels exactly that way. Moreover, the more participants there were, the stronger the bias: winning over ten competitors means a more extreme estimate than winning over two.
A distinct detail that exacerbates the effect. Unlike an oil tract, the candidate knows more about themselves than the employer does. They see all the offers and understand which one stands out. Asymmetry here does not work in favor of the buyer.
What protects against overpaying: determining the range before bargaining starts and based on the weight of the role, rather than the behavior of competitors; fixing in advance at what level you exit the contest; remembering that the need to sharply outbid the market is a signal that the evaluation of the role likely diverges from the market; and evaluating the candidate on verifiable grounds, rather than by how much others are willing to pay for them.
Winning a bidding war is information. Just not the kind it is usually taken for.