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Knowing me, imagining you: Projection and overbidding in auctions

Breitmoser, Yves (2016): Knowing me, imagining you: Projection and overbidding in auctions.

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Abstract

Overbidding in auctions has been attributed to risk aversion, loser regret, level-k, and cursedness, though relying on different identifying assumptions. I argue that "type projection" organizes these findings and better captures observed behavior. Type projection formally models that people tend to believe others have object values similar to their own -- a robust psychological phenomenon that naturally applies to auctions. First, I show that type projection implies the main behavioral phenomena in auctions, including increased sense of competition (like loser regret) and broken Bayesian updating (like cursedness). Second, re-analyzing data from seven experiments, I show that type projection explains the stylized facts of behavior across private and common value auctions. Third, in a structural analysis nesting existing approaches and emphasizing robustness, type projection consistently captures behavior best, in-sample and out-of-sample. The results reconcile bidding patterns across conditions and have implications for behavioral and empirical analyses as well as policy.

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