Loss Aversion and Competition in Vickrey Auctions: Money Ain't No Good

Rosato, Antonio and Tymula, Agnieszka (2016): Loss Aversion and Competition in Vickrey Auctions: Money Ain't No Good.

Abstract

We present results from an experiment with a within-subject design aimed at testing a unique prediction of expectations-based reference-dependent preferences and loss aversion in private-value second-price (Vickrey) auctions. If bidders have expectationsbased reference-dependent preferences, the total number of participants in an auction should affect bids in auctions for real objects but not in auctions with induced monetary values. Our findings are consistent with expectations-based reference-dependent preferences and loss aversion. In real-object auctions, subjects' bids are affected by the number of competitors and, on average, they decline with the intensity of competition. In induced-value auctions, instead, bids are unaffected by the intensity of competition. We also successfully replicate an experiment from Sprenger (2015) aimed at distinguishing expectations-based loss aversion from models of Disappointment Aversion. This provides additional evidence that our findings in the auction experiments are due to expectations-based loss aversion.

• Item Type: MPRA Paper
• Language: English
• Keywords: Auctions; Reference-Dependent Preferences; Loss Aversion; Expectations
• Subjects: C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C91 - Laboratory, Individual Behavior; C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C92 - Laboratory, Group Behavior; D - Microeconomics > D0 - General > D03 - Behavioral Microeconomics: Underlying Principles; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D44 - Auctions; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D84 - Expectations ; Speculations

References

Abeler, J., A. Falk, L. Goette and D. Huffman (2011), "Reference Points and Effort Provision" American Economic Review, 101(2), 470-492.

Banerji, A. and N. Gupta (2014), "Detection, Identification and Estimation of Loss Aversion: Evidence from an Auction Experiment" American Economic Journal: Microeconomics, 6(1), 91-133.

Bartling, B., L. Brandes and D. Schunk (2015), "Expectations as Reference Points: Field Evidence from Professional Soccer" Management Science, 61(11), 2646- 2661.

Becker, G., M. Degroot and J. Marschak (1964), "Measuring Utility by a Single-Response Sequential Method" Behavioral Science, 9(3), 226-232.

Bell, D. (1985), "Disappointment in Decision Making under Uncertainty" Operations Research, 33(1), 1-27.

Bulow, J., and P. Klemperer (1996), "Auctions Versus Negotiations" American Economic Review 86(1), 180-194.

Card, D., and G. Dahl (2011), "Family Violence and Football: The Effect of Unexpected Emotional Cues on Violent Behavior" Quarterly Journal of Economics 126(1), 103-143.

Cason, T., and C. Plott (2014), "Misconceptions and Game Form Recognition: Challenges to Theories of Revealed Preference and Framing" Journal of Political Economy 122(6), 1235-1270.

Chen, Y., P. Katuscak and E. Ozdenoren (2007) "Sealed Bid Auctions with Ambiguity: Theory and Experiments" Journal of Economic Theory, 136(1), 513-535

Cooper, D. and H. Fang (2008), "Understanding Overbidding in Second Price Auctions: An Experimental Study" Economic Journal, 118(532), 1572-1595.

Crawford, V. and N. Iriberri (2007) "Level-k Auctions: Can a Nonequilibrium Model of Strategic Thinking Explain the Winner's Curse and Overbidding in Private- Value Auctions?" Econometrica, 75(6), 1721-1770.

Crawford, V. and J.J. Meng (2011) "New York City Cabdrivers' Labor Supply Revisited: Reference-dependent Preferences with Rational Expectations Targets for Hours and Income" American Economic Review, 101(5), 1912-1932.

Cubitt, R., C.Starmer and R. Sudgen (1998), "On the Validity of the Random Lottery Incentive System" Experimental Economics, 1(2), 115-131.

Eisenhuth, R. (2012), "Reference Dependent Mechanism Design" Working Paper.

Eisenhuth, R. and M. Ewers (2012), "Auctions with Loss Averse Bidders" Working Paper.

Ericson Marzilli, K.M. and A. Fuster (2011), "Expectations as Endowments: Evidence on Reference-Dependent Preferences from Exchange and Valuation Experiments" Quarterly Journal of Economics, 126(4), 1879-1907.

Fischbacher, U. (2007), "z-Tree: Zurich Toolbox for Ready-made Economic Experiments " Experimental Economics, 10(2), 171-178.

Garratt, R., M. Walker and J. Wooders (2012), "Behavior in Second-price Auctions by Highly Experienced eBay Buyers and Sellers" Experimental Economics, 15(1), 44-57.

Georganas, S., D. Levin and P. McGee (2015), "A New Perspective on Overbidding in Private-Value Auctions" Working Paper.

Gill, D. and V. Prowse (2012), "A Structural Analysis of Disappointment Aversion in a Real Effort Competition" American Economic Review, 102(1), 469-503.

Greiner, B. (2015) "Subject Pool Recruitment Procedures: Organizing Experiments with ORSEE" Journal of the Economic Science Association, 1(1), 114-125.

Gul, F. (1991) "A Theory of Disappointment Aversion" Econometrica, 59(3), 667-686.

Harstad, R. (2000), "Dominant Strategy Adoption and Bidders' Experience with Pricing Rules" Experimental Economics, 3(3), 261-280.

Heffetz, O. and J. List (2014), "Is the Endowment Effect an Expectations Effect?" Journal of the European Economic Association, 12(5), 1396-2014.

Herweg, F., D. M�uller and P. Weinschenk (2010), "Binary Payment Schemes: Moral Hazard and Loss Aversion" American Economic Review, 100(5), 2451-2477.

Kagel, J. (1995), Auctions: A Survey of Experimental Research. In: Kagel,J., Roth, A. (Eds.), The Handbook of Experimental Economics. Princeton University Press, 501- 586.

Kagel, J., R. Harstad and D. Levin (1987), "Information Impact and Allocation Rules in Auctions with Affiliated Private Values: A Laboratory Study" Econometrica, 55(6), 1275-1304.

Kagel, J. and D. Levin (1993), "Independent Private Value Auctions: Bidder Behaviour in First-, Second- and Third-Price Auctions with Varying Numbers of Bidders" Economic Journal, 103(419), 868-879.

Kagel, J. and D. Levin (forthcoming), Auctions: A Survey of Experimental Research: 1995-2014. In: Kagel,J., Roth, A. (Eds.), The Handbook of Experimental Economics, Vol. 2. Princeton University Press.

Kahneman, D. and A. Tversky (1979), "Prospect Theory: An Analysis of Decision under Risk" Econometrica, 47(2), 263-291.

Kahneman, D., J.L. Knetsch and R. Thaler (1990), "Experimental Tests of the Endowment Effect and the Coase Theorem" Journal of Political Economy, 98(6), 1325- 1348.

Kahneman, D., J.L. Knetsch and R. Thaler (1991), "Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias" Journal of Economic Perspectives, 5(1), 193-206.

Karle, H., G. Kirchsteiger and M. Peitz (2015), "Loss Aversion and Consumption Choice: Theory and Experimental Evidence" American Economic Journal: Microeconomics, 7(2), 101-120.

Koszegi, B. and M. Rabin (2006), "A Model of Reference-Dependent Preferences" Quarterly Journal of Economics, 121(4), 1133-1165.

Koszegi, B. and M. Rabin (2007), "Reference-Dependent Risk Attitudes" American Economic Review, 97(4), 1047-1073.

Lange, A. and A. Ratan (2010), "Multi-dimensional Reference-dependent Preferences in Sealed-bid auctions: How (most) Laboratory Experiments Differ from the Field" Games and Economic Behavior, 68(2), 634-645.

Li, S. (2015) "Obviously Strategy-Proof Mechanisms" Working Paper.

Loomes, G. and R. Sudgen (1986), "Disappointment and Dynamic Consistency in Choice under Uncertainty" Review of Economic Studies, 53(2), 271-282.

Mazar, N., B. Koszegi and D. Ariely (2014), "True Context-dependent Preferences? The Causes of Market-dependent Valuations" Journal of Behavioral Decision Making, 27(3), 200-208.

Morgan, J., K. Steiglitz and G. Reis (2003) "The Spite Motive and Equilibrium Behavior in Auctions" Contributions to Economic Analysis & Policy, 2(1), Article 5.

Ozbay, E. and E. Ozbay (2007), "Auctions with Anticipated Regret: Theory and Evidence" American Economic Review, 97(4), 1407-1418.

Pope, D. and M. Schweitzer (2011), "Is Tiger Woods Loss Averse? Persistent Bias in the Face of Experience, Competition, and High Stakes" American Economic Review, 101(1), 129-157.

Rabin, M. and G. Weizsacker (2009), "Narrow Bracketing and Dominated Choices" American Economic Review, 99(4), 1508-1543.

Sprenger, C. (2015), \An Endowment Effect for Risk: Experimental Tests of Stochastic Reference Points" Journal of Political Economy, 123(6), 1456-1499.

Starmer, C. and R. Sudgen (1991), "Does the Random-Lottery Incentive System Elicit True Preferences? An Experimental Investigation " American Economic Review, 81(4), 971-978.

Thaler, R. (1985), "Mental Accounting and Consumer Choice" Marketing Scence, 4(3), 199-214.

Thaler, R. (1999), "Mental Accounting Matters" Journal of Behavioral Decision Making, 12(3), 183-206.

Tymula, A., E. Woelbert and P. Glimcher (2013) "Flexible Valuations for Consumer Goods as Measured by The Becker-DeGroot-Marschak Mechanism" University of Sydney Working Paper.

Tversky, A. and D. Kahneman (1981), "The Framing of Decisions and the Psychology of Choice" Science, 211(4481), 453-458.

Tversky, A. and D. Kahneman (1991), "Loss Aversion in Riskless Choice: A Reference-Dependent Model" Quarterly Journal of Economics, 106(4), 1039-1061.

Vickrey, W. (1961), "Counterspeculation and Competitive Sealed Tenders" Journal of Finance, 16(1), 8-37.

Wenner, L. (2015), "Expected Prices as Reference Points - Theory and Experiments" European Economic Review, 75, 60-79.