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Loss Aversion, Expectations and Anchoring in the BDM Mechanism

Vassilopoulos, Achilleas and Drichoutis, Andreas C. and Nayga, Rodolfo (2018): Loss Aversion, Expectations and Anchoring in the BDM Mechanism.

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Abstract

We present the results of an economic laboratory experiment that tests behavioral biases that have been associated with the BDM mechanism. By manipulating the highest random competing bid, the maximum possible loss, the distribution of prices and the elicitation format, we attempt to disentangle the effects of reference-dependence, expectations as well as price and loss anchoring on subjects' bids. The results show that bids are affected by expectations and anchoring on the highest price but not by anchoring on the maximum possible loss. In addition, results are supportive of the no-loss-in-buying hypothesis of Novemsky and Kahneman (2005).

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