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.

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).

• Item Type: MPRA Paper
• Language: English
• Keywords: Becker-DeGroot-Marschak (BDM) mechanism; expectations; anchoring; valuation; experiment
• Subjects: C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C91 - Laboratory, Individual Behavior; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D44 - Auctions

References

Austin, P. C. (2009, November). Balance diagnostics for comparing the distribution of baseline covariates between treatment groups in propensity-score matched samples. Statistics in Medicine 28 (25), 3083-3107.

Banerji, A. and N. Gupta (2014). Detection, identiffication, and estimation of loss aversion: Evidence from an auction experiment. American Economic Journal: Microeconomics 6 (1), 91-133.

Bateman, I., A. Munro, B. Rhodes, C. Starmer, and R. Sugden (1997). A test of the theory of reference-dependent preferences. Quarterly Journal of Economics 112 (2), 479-505.

Becker, G. M., M. H. DeGroot, and J. Marschak (1964). Measuring utility by a single-response sequential method. Behavioral science 9 (3), 226-232.

Bohm, P., J. Linden, J.n, and J. Sonnegard (1997). Eliciting reservation prices: Becker-de Groot-Marschak mechanisms vs. markets. The Economic Journal 107 (443), 1079-1089.

Bordalo, P., N. Gennaioli, and A. Shleifer (2012). Salience theory of choice under risk. The Quarterly Journal of Economics 127 (3), 12431285.

Bordalo, P., N. Gennaioli, and A. Shleifer (2013). Salience and consumer choice. Journal of Political Economy 121 (5), 803-843.

Brewer, N. T. and G. B. Chapman (2002). The fragile basic anchoring effect. Journal of Behavioral Decision Making 15 (1), 65-77.

Briz, T., A. C. Drichoutis, and R. M. Nayga Jr (2017). Randomization to treatment failure in experimental auctions: The value of data from training rounds. Journal of Behavioral and Experimental Economics 71, 56-66.

Cason, T. N. and C. R. Plott (2014). Misconceptions and game form recognition: Challenges to theoriesof revealed preference and framing. Journal of Political Economy 122 (6), 1235-1270.

Chapman, G. B. and E. J. Johnson (1994). The limits of anchoring. Journal of Behavioral Decision Making 7 (4), 223-242.

Cochran, W. G. and D. B. Rubin (1973). Controlling bias in observational studies: A review. Sankhya: The Indian Journal of Statistics, Series A 35 (4), 417-446.

Deaton, A. and N. Cartwright (2017). Understanding and misunderstanding randomized controlled trials. Social Science & Medicine (In press).

Fischbacher, U. (2007). z-tree: Zurich toolbox for ready-made economic experiments. Experimental Economics 10 (2), 171-178.

Greiner, B. (2015). Subject pool recruitment procedures: Organizing experiments with ORSEE. Journal of the Economic Science Association 1 (1), 114-125.

Gutenbrunner, C., J. Jureckove, R. Koenker, and S. Portnoy (1993). Tests of linear hypotheses based on regression rank scores. Journal of Nonparametric Statistics 2 (4), 307-331.

Harrell, F. E., R. M. Califf, D. B. Pryor, K. L. Lee, and R. A. Rosati (1982). Evaluating the yield of medical tests. JAMA: The Journal of the American Medical Association 247 (18), 2543-2546.

Heidhues, P. and B. K}oszegi (2014, January). Regular prices and sales. Theoretical Economics 9 (1), 217-251.

Ho, D. E., K. Imai, G. King, and E. A. Stuart (2007). Matching as nonparametric preprocessing for reducing model dependence in parametric causal inference. Political Analysis 15 (3), 199-236.

Horowitz, J. K. (2006). The becker-degroot-marschak mechanism is not necessarily incentive compatible, even for non-random goods. Economics Letters 93 (1), 6-11.

Imbens, G. W. and D. B. Rubin (2016). Causal Inference for Statistics, Social, and Biomedical Sciences, An introduction. Cambridge and New York: Cambridge University Press.

Imbens, G. W. and J. M. Wooldridge (2009). Recent developments in the econometrics of program evaluation. Journal of Economic Literature 47 (1), 5-86.

Isoni, A. (2011). The willingness-to-accept/willingness-to-pay disparity in repeated markets: Loss aversion or `bad-deal' aversion? Theory and Decision 71 (3), 409-430.

Kahneman, D. and A. Tversky (1979). Prospect theory: An analysis of decision under risk. Econometrica 47 (2), 263-292.

Karni, E. and Z. Safra (1987). \preference reversal" and the observability of preferences by experimental methods. Econometrica, 675-685.

Koszegi, B. and M. Rabin (2006). A model of reference-dependent preferences. The Quarterly Journal of Economics 121 (4), 1133-1165.

Koszegi, B. and A. Szeidl (2013). A model of focusing in economic choice. The Quarterly Journal of Economics 128 (1), 53-104.

Mann, H. B. and D. R. Whitney (1947). On a test of whether one of two random variables is stochastically larger than the other. The Annals of Mathematical Statistics 18 (1), 50-60.

Marzilli Ericson, K. M. and A. Fuster (2011). Expectations as endowments: Evidence on reference-dependent preferences from exchange and valuation experiments. The Quarterly Journal of Economics, 1-29.

Mazar, N. and D. Ariely (2006). Dishonesty in everyday life and its policy implications. Journal of Public Policy & Marketing 25 (1), 117-126.

Mazar, N., B. Koszegi, and D. Ariely (2013). True context-dependent preferences? The causes of market-dependent valuations. Journal of Behavioral Decision Making.

Moher, D., S. Hopewell, K. F. Schulz, V. Montori, P. C. Gtzsche, P. J. Devereaux, D. Elbourne, M. Egger, and D. G. Altman (2010). CONSORT 2010 explanation and elaboration: updated guidelines for reporting parallel group randomised trials. BMJ 340.

Mood, A. M. (1954). On the asymptotic efficiency of certain nonparametric two-sample tests. The Annals of Mathematical Statistics 25 (3), 514-522.

Morewedge, C. K. and D. Kahneman (2010). Associative processes in intuitive judgment. Trends in Cognitive Sciences 14 (10), 435-440.

Mutz, D. C. and R. Pemantle (2015). Standards for experimental research: Encouraging a better understanding of experimental methods. Journal of Experimental Political Science 2 (2), 192-215.

Novemsky, N. and D. Kahneman (2005). The boundaries of loss aversion. Journal of Marketing Research, 119-128.

Plott, C. R. and K. Zeiler (2004). The willingness to pay/willingness to accept gap, the endowment effect, subject misconceptions and experimental procedures for eliciting valuations. American Economic Review 95, 530-530.

Plott, C. R. and K. Zeiler (2007). Exchange asymmetries incorrectly interpreted as evidence of endowment effect theory and prospect theory? The American Economic Review 97 (4), 1449-1466.

Ratan, A. (2015). Does displaying probabilities affect bidding in first-price auctions? Economics Letters 126, 119-121.

Smith, A. (2008). Lagged beliefs and reference-dependent utility. Unpublished paper, University of Arizona.

Smith, A. (2012). Lagged beliefs and reference-dependent preferences. working paper, California Institute of Technology.

Sugden, R., J. Zheng, and D. J. Zizzo (2013, December). Not all anchors are created equal. Journal of Economic Psychology 39, 21-31.

Taylor, S. E. and S. C. Thompson (1982). Stalking the elusive "vividness" effect. Psychological Review 89 (2), 155-181.

Tversky, A. and D. Kahneman (1974). Judgment under uncertainty: Heuristics and biases. Science 185 (4157), 1124-1131.

Tversky, A. and D. Kahneman (1991). Loss aversion in riskless choice: A reference-dependent model. The Quarterly Journal of Economics 106 (4), 1039-1039.

Tymula, A., E. Woelbert, and P. Glimcher (2016). Flexible valuations for consumer goods as measured by the BeckerDeGrootMarschak mechanism. Journal of Neuroscience, Psychology, and Economics 9 (2), 65-77.

Urbancic, M. (2011). Testing distributional dependence in the becker-degroot-marschak mechanism. Mimeo.

Vickrey, W. (1961). Counterspeculation, auctions, and competitive sealed tenders. The Journal of Finance 16 (1), 8-37.

Wenner, L. M. (04/2015). Expected prices as reference pointstheory and experiments. European Economic Review 75, 60-79.

Wilcox, R. R., D. M. Erceg-Hurn, F. Clark, and M. Carlson (2013). Comparing two independent groups via the lower and upper quantiles. Journal of Statistical Computation and Simulation 84 (7), 1543-1551.

Wilson, T. D., C. E. Houston, K. M. Etling, and N. Brekke (1996). A new look at anchoring effects: basic anchoring and its antecedents. Journal of Experimental Psychology: General 125 (4), 387.