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How Losses affect Bidding Behavior in Vickrey Auctions

Parkhurst, Gregory M and Shogren, Jason F (2011): How Losses affect Bidding Behavior in Vickrey Auctions.

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Abstract

We use Vickrey uniform auctions to provide an indirect robustness test of the endowment effect. Our panel data promotes two results: (1) evidence of the endowment effect exists in that risk seeking behavior following losses is less severe for 'out of pocket' losses as opposed to foregone gain. We did not find support for the prediction that bidders recoil from future losses following a realized loss (i.e., become more risk averse); and (2) a form of gamblers fallacy termed the escalation of commitment better explains bidding behavior for inexperienced bidders—risk seeking bidding behavior is observed following a loss. But as bidders gain experience the escalation of commitment is attenuated for “out of pocket” losses but not for foregone gains.

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