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Bidding on a painting worth a uniform amount

Question

A painting's true worth VV is uniformly distributed on [0,100,000][0, 100{,}000] dollars, and you do not know VV. You submit a single bid bb; if b>Vb > V you buy the painting for bb and immediately resell it to a museum for 1.5V1.5V, otherwise nothing happens. What bid maximises your expected profit? (Answer $0\text{\char36}0 if no bid gives a positive expected profit.)

Short answer

Bid $0\text{\char36}0. Winning with bid bb tells you V<bV<b, so conditionally VV is uniform on [0,b][0,b] with mean b/2b/2 and the resale is worth 0.75b0.75b on average. You always pay more than you expect to recoup, so any positive bid has negative expected profit (winner's curse).

Adapted from QuantQuestions.io; question and answer rewritten by SelfMadeQuant.com.

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