Auctions with Anticipated Regret

This paper demonstrates theoretically and experimentally that in first price auctions, overbidding with respect to risk neutral Nash equilibrium might be driven from anticipated loser regret (felt when bidders lose at an affordable price). Different information structures are created to elicit regret: bidders know they will learn the winning bid if they lose (loser regret condition); or the second highest bid if they win (winner regret condition); or no information regarding the other bids. Bidders only in loser regret condition anticipated regret and significantly overbid; in the other conditions bidders did not anticipate regret and hence did not overbid.overbidding, first price auction, anticipated regret

An Experimental Study of Japanese Procurement Auctions with Endogenous Minimum Prices

ISER discussion paperJune 2009, Revised July 201

Essays in Behavioral Economics: Applying Prospect theory to Auctions

I explore the implications of reference-dependent preferences in sealed-bid auctions. In the first part, I develop a Prospect theory based model to explain bidding in first-price auctions. I show that bidding in induced-value first-price sealed-bid auctions can be rationalized as a combination of reactions to underlying ambiguity and anticipated loss aversion. Using data from experimental auctions, I provide evidence that in induced-value auctions with human bidders, this approach works well. In auctions with prior experience and /or against risk-neutral Nash rivals where ambiguity effects could be altogether irrelevant, anticipated loss aversion by itself can explain aggressive bidding. This is a novel result in the literature. Using data from experiments, I find that ambiguity effects become negligible in auctions with experienced human bidders against (i) experienced human rivals and (ii) Nash computer rivals, when loss aversion is taken in consideration. The estimates for loss aversion are similar in auctions with human bidders (with or without experience). Next, I extend my approach of anticipated loss aversion to address bidding outcomes in first- and second-price sealed-bid auctions. As shown in first part, the model predicts overbidding in first-price induced-value auctions consistent with evidence from most laboratory experiments. However, substantially different bidding behavior could result in commodity auctions where money and auction item are consumed along different dimensions of the consumption space. Differences also result in second-price auctions. The study thereby indicates that transferring qualitative behavioral findings from induced-value laboratory experiments to the field may be problematic if subjects are loss averse and anticipate such losses at the time of bidding. Finally, I explore the effect of resale or procurement opportunities, to which bidders have heterogeneous market access, on bidding in first- price sealed-bid auctions. My models suggest that in auctions with resale, loss aversion causes underbidding with respect to the risk-neutral-Nash prediction. Bidders with greatest level of market access are least affected by loss aversion and therefore bid closer to the risk-neutral-Nash than bidders with smaller market access. In auctions with procurement, the effect of loss aversion is such that it causes overbidding (underbidding) for bidders with respect to the risk-neutral-Nash. Bidders with greatest level of market access are again least affected by loss aversion and therefore bid much conservatively and closer to the risk-neutral-Nash than bidders with very low market access. If market access is interpreted as a proxy for experience, the predictions of my model are qualitatively similar to the findings in List (2003, 2004). Since these indirect effects are obtained without altering reference-dependent preferences, it raises the possibility that the effects obtained in List (2003, 2004) in field settings may not arise entirely due to the direct effect of experience on reference-dependent preferences. This calls for a more careful reexamination of the underlying issues

Measuring Emotions in Electronic Auctions

This book develops a structured methodology that allows to systematically analyze emotions in auctions. It provides a unified framework for emotional bidding in auctions, which comprises the bidders\u27 processes of cognitive reasoning and emotional processing, and a methodology for measuring physiological correlates of human emotional processing in economic experiments is proposed: physioeconomics. Finally, an experiment is presented which investigates the impact of clock speeds in Dutch auctions

Risk- & Regret-Averse Bidders in Sealed-Bid Auctions

Overbidding, bidding more than risk-neutral Bayesian Nash Equilibrium, is a widely observed phenomenon in virtually all experimental auctions. The scholars within the auction literature propose the risk-averse preference model to explain overbidding structurally. However, the risk-averse preference model predicts underbidding in such important classes of auctions as all-pay auctions. To solve this discrepancy, we construct a structural model of bidding behavior in sealed-bid auctions, one in which bidders may regret their decisions. Our model nests both risk-averse and regret-averse attitudes and aims to explain overbidding in a wider class of auctions. We first derive equilibrium first-order conditions, which are used for estimation and calibration analyses, and show monotonic increasing properties of equilibrium bidding functions. Second, we carry out structural estimation and calibration analyses based on experimental data from Kagel and Levin (1993) and Noussair and Silver (2006). With these structurally estimated parameters, we test the significance of bidders’ risk-averse and regret-averse attitudes. The estimation results show that bidders exhibit weak risk-averse (close to risk-neutral) and strong regret-averse attitudes. Furthermore, regret-averse attitudes are significant when bidders anticipate losing. Calibration results demonstrate that our risk- & regret-averse model can explain overbidding across all of the above IPV auctions. Third, we simulate our model with the estimated parameters and obtain revenue rankings numerically. This allows us to confirm the revenue supremacy in all-pay auctions reported in experimental auction literature. We discuss extensions to asymmetric and Common-Value (CV) auctions in our online appendix

Rational Individual Behavior in Markets and Social Choice Processes

This paper reviews a series of paradoxes that exist in the experimental economics literature. These paradoxes are instances in which otherwise accurate models of markets and social choice processes fail to capture the data of experiments. A loosely developed theory called The Discovered Preference Hypothesis is advanced in the paper as an explanation. Behavior seems to go through stages of rationality that begin with a type of myopia when faced with unfamiliar tasks. With incentives and practice, which might take the form of repeated decisions in the experimental work, (but might include play, banter, discussions with others, stages of commitment, etc.) the myopia gives way to what appears to be a. stage of more considered choices that reflect stable attitudes or preferences (as opposed to the labile attitudes identified by psychologists). Social institutions are seen as playing a role in the attainment of a third stage of rationality in which individual decisions incorporate the rationality of others, or the lack of it, in their own decisions

Side-Payments and the Costs of Conflict.

Conflict and competition often impose costs on both winners and losers, and conflicting parties may prefer to resolve the dispute before it occurs. The equilibrium of a conflict game with side-payments predicts that with binding offers, proposers make and responders accept side-payments, generating settlements that strongly favor proposers. When side-payments are non-binding, proposers offer nothing and conflicts always arise. Laboratory experiments confirm that binding side-payments reduce conflicts. However, 30% of responders reject binding offers, and offers are more egalitarian than predicted. Surprisingly, non-binding side-payments also improve efficiency, although less than binding. With binding side-payments, 87% of efficiency gains come from avoided conflicts. However, with non-binding side-payments, only 39% of gains come from avoided conflicts and 61% from reduced conflict expenditures.contests, conflict resolution, side-payments, experiments

Endowment Origin, Demographic Effects and Individual Preferences in Contests

In modern firms the use of contests as an incentive device is ubiquitous. Nonetheless, recent experimental research shows that in the laboratory subjects routinely make suboptimal decisions in contests even to the extent of making negative returns. The purpose of this study is to investigate if changing how agents are endowed with resources can increase the efficiency in contests. To this end, we conduct a laboratory experiment in which subjects are asked to allot costly resources (bids) in an effort to attain an award (prize). In line with other laboratory studies of contests, our results show that subjects overbid relative to theoretical predictions and incur substantial losses as a result. Making subjects earn their initial resource endowments mitigates the amount of overbidding and thus increases overall efficiency. Overbidding is also linked to gender with women bidding higher than men and having lower average earnings. Other demographic information such as religiosity and individual preferences towards winning and risk also contribute to excessive bidding

Make Him an Offer He Can’t Refuse: Avoiding Conflicts through Side Payments

The equilibrium of a two-stage conflict game with side-payments predicts that with binding stage-one offers, proposers make and responders accept side-payments, generating settlements that strongly favor proposers. When side-payments are non-binding, proposers offer nothing and conflicts always arise. Laboratory experiments confirm that binding side-payments reduce conflicts. However, 30% of responders reject binding offers, and offers are more egalitarian than predicted. Surprisingly, non-binding side-payments also improve efficiency, although less than binding. With binding side-payments, 98% of efficiency gains come from avoided conflicts. However, with non-binding side-payments, only 49% of gains come from avoided conflicts and 51% from reduced conflict expenditures.contest, conflict resolution, side payments, experiments