Cursed Equilibrium Revisited

Abstract

Empirical as well as experimental evidence strongly suggests that bidders in common value auctions typically do not conform to the requirements of perfect rationality. Eyster and Rabin (2005) develop a theory and an equilibrium concept - x-cursed equilibrium - for bounded rational bidding in common value auctions (among other situations), and also present some experimental evidence supporting the theory. This paper comments on these findings of an experiment conducted at the University of Bergen. In the experiment, participants often demonstrate behaviour that is beyond the bounds set by the x-cursed equilibrium theory, and I present an alternative theory that better explains the experimental findings.common value auctions; winner's curse; bounded rationality; experiments.