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Subjective Probabilities In Games: An Application To The Overbidding Puzzle

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  • Olivier Armantier
  • Nicolas Treich

Abstract

This article illustrates how the joint elicitation of subjective probabilities and preferences may help us understand behavior in games. We conduct an experiment to test whether biased probabilistic beliefs may explain overbidding in first-price auctions. The experimental outcomes indicate that subjects underestimate their probability of winning the auction, and indeed overbid. When provided with feedback on the precision of their predictions, subjects learn to make better predictions, and to curb significantly overbidding. The structural estimation of different behavioral models suggests that biased probabilistic beliefs are a driving force behind overbidding, and that risk aversion plays a lesser role than previously believed. Copyright � (2009) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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Bibliographic Info

Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 50 (2009)
Issue (Month): 4 (November)
Pages: 1079-1102

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Handle: RePEc:ier:iecrev:v:50:y:2009:i:4:p:1079-1102

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Cited by:
  1. Armantier, Olivier & Treich, Nicolas, 2010. "Eliciting Beliefs: Proper Scoring Rules, Incentives, Stakes and Hedging," IDEI Working Papers 643, Institut d'Économie Industrielle (IDEI), Toulouse.
  2. Florian Artinger & Filippos Exadaktylos & Hannes Koppel & Lauri Sääksvuori, 2010. "Applying Quadratic Scoring Rule transparently in multiple choice settings: A note," ThE Papers 10/01, Department of Economic Theory and Economic History of the University of Granada..
  3. Armantier, Olivier & Treich, Nicolas, 2009. "Star-Shaped Probability Weighting Functions and Overbidding in First-Price Auctions," TSE Working Papers 09-024, Toulouse School of Economics (TSE).
  4. Iñigo Iturbe Ormaetxe & Giovanni Ponti & Josefa Tomás & Luis Ubeda, 2008. "Framing Effects in Public Goods: Prospect Theory and Experimental Evidence," Working Papers. Serie AD 2008-15, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  5. Carvalho, M., 2012. "Static vs Dynamic Auctions with Ambiguity Averse Bidders," Discussion Paper 2012-022, Tilburg University, Center for Economic Research.
  6. Sascha Füllbrunn & Tibor Neugebauer, 2013. "Varying the number of bidders in the first-price sealed-bid auction: experimental evidence for the one-shot game," Theory and Decision, Springer, vol. 75(3), pages 421-447, September.
  7. repec:wyi:journl:002158 is not listed on IDEAS
  8. Trautmann, S.T. & Kuilen, G. van de, 2011. "Belief Elicitation: A Horse Race among Truth Serums," Discussion Paper 2011-117, Tilburg University, Center for Economic Research.
  9. Pagnozzi, Marco & Saral, Krista Jabs, 2013. "Multi-Object Auctions with Resale: An Experimental Analysis," MPRA Paper 43665, University Library of Munich, Germany.
  10. Neri, Claudia, 2012. "Eliciting Beliefs in Continuous-Choice Games: A Double Auction Experiment," Economics Working Paper Series 1207, University of St. Gallen, School of Economics and Political Science, revised Dec 2012.
  11. Mariana Blanco & Dirk Engelmann & Alexander Koch & Hans-Theo Normann, 2010. "Belief elicitation in experiments: is there a hedging problem?," Experimental Economics, Springer, vol. 13(4), pages 412-438, December.
  12. Jordi Brandts & Gary Charness, 2011. "The strategy versus the direct-response method: a first survey of experimental comparisons," Experimental Economics, Springer, vol. 14(3), pages 375-398, September.
  13. Luca Corazzini & Stefano Galavotti & Rupert Sausgruber & Paola Valbonesi, 2012. "Allotment In First-Price Auctions: An Experimental Investigation," "Marco Fanno" Working Papers 0153, Dipartimento di Scienze Economiche "Marco Fanno".

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