The Loser's Curse

I had lunch with my friend Jonathan yesterday and he explained the winner's and loser's curses to me.

The winner's curse is Microsoft (my assertion not Jonathan's). It happens when a company is so good at one thing that they win big. But when its time to change, they just can't stop doing the things that made them so successful in the past that no longer work.

The loser's curse is when you fail at something so badly that you never want to try it again even if there are other and better ways to do it that may result in a better outcome.

I certainly suffer from the loser's curse. There are things that I am not going to try again even though the outcome may be very different if I did.

I was reminded of this today when I got an email from someone who is working in the fantasy sports area. At Flatiron we backed a company called Smallworld Sports which was one of the leading fantasy sports services in 1999.

The year before we invested they had done something like a million in revenue and made money. We invested a lot of money in them, I can't remember exactly how much but it was between $5mm and $10mm.

The year after we invested, they did about the same amount of revenue and lost well over $5mm. Venture capital killed that company and it was sold for pennies on the diollar to The Sporting News.

Never again.

I realize that times have changed. Games and sports on the web are bigger than ever. Social networking brings an important new component to the fantasy sports equation. A different management team and business model might make a big difference.

Doesn't matter. Been there. Not going back.

The loser's curse.

Comments

[howard lindzon]

Same thing happens with stocks.

[Kyle S]

In economics, the winner's curse describes the phenomenon in which the winner of an auction for an item with uncertain value (like an oil field or a free agent baseball player) is likely to be disappointed. This is because although the winner by definition had the highest estimation of the item's value, its true value is likely to be near the mean of all valuations.

you could think of a bootstrapped company that many VC firms were chasing. assume they sign with whoever gives them the best deal, defined however you like (highest pre-money valuation, maybe). the winning VC firm is likely to be disappointed, because of all the firms that looked at them, their bid was the most pollyanna-ish.

[Phil]

actually, the winner's curse is a concept coined by richard thaler in his book on behavioral economics called "the winner's curse" and it describes how, when there are multiple bidders on a single auction, the "winner" often pays too much for the asset.

we all witnessed this recently in the hot r.e. market where multiple bidders would often bid properties up above fair value and we also see it all the time in m&a when a company pays too much for another after a bidding war.

what you describe as the winner's curse is really more a case of cognitive and organizational conservatism (ward edwards term) which i describe (with tenacious verbosity) on my blog recently looking at companies such as nyt and wsj that have failed to make changes amid a rapidly evolving media landscape...

your hesitance to try the same thing again after a miscue is an example of "loss aversion" which is innate to humans and the subject of prospect theory which basically proves that as kahneman and tversky put it "losses loom larger than gains..."

forgive all the corrections please but it is infrequent someone (besides me) actually blogs about this shit i know too much about...

;-)

[Jarid]

Does that mean I shouldn't send you my business plan for KozmoFetch 2.0... ;)

[Andy Swan]

Considering my love of playing golf, I must have immunity to the loser's curse. :)

[Andy Swan]

Considering my love of playing golf, I must have immunity to the loser's curse. :)

[Jon Kelly]

Kyle & Phil are right regarding the definition of the winner's curse. I believe what best describes Microsoft's inability to change is Clayton Christensen's "Innovator's Dilemma."

[grammarnazi]

minor niggle: it's / its

"But when its time to change" should be it's.

Sorry, but this one kills me. =)

[Brian]

Fred,

You should give fantasy sports another shot. Despite your experience with Smallworld, Fantasy sports have experienced tremendous and steady online growth in the last 10 years. Community, user generated content, social networking and multi-platform publishing (mobile) are all trends that originated on fantasy sports communities way before there was a web 2.0. Even better, these trends were created by fantasy players in spite of the technology of the platform (which hasn’t improved much in the last five years), and not by a web service trying to push it onto their users. There is a tremendous opportunity to take fantasy sports to the next level and I would love to see the result when you apply some of your own ideas to fantasy.

Think of Ruben Sierra on the Yanks or Steve Jobs at Apple to show that the loser’s curse can easily be broken!

[celt]

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[Dave]

I suspect that this "loser's curse" is a variant of "fool me once, shame on you; fool me twice, shame on me." It's unfortunate to lose money in an investment, but it's normal in venture capital to throw a few zeroes. Nobody particularly notices. But, if you fail again in the same basic category, everyone (including yourself) will look at it and say, "didn't you learn anything the last time?" The cost of failure goes up the second time because you should have known better.

[ventureblogalist]

similar to how hollywood has not done a train hijacking movie ever since steven segal ruined that genre.