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The value of victory: social origins of the winner's curse in common value auctions

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Author Info

  • Wouter van den Bos
  • Jian Li
  • Tatiana Lau
  • Eric Maskin
  • Jonathan D. Cohen
  • P. Read Montague
  • Samuel M. McClure

Abstract

Auctions, normally considered as devices facilitating trade, also provide a way to probe mechanisms governing one's valuation of some good or action. One of the most intriguing phenomena in auction behavior is the winner's curse --- the strong tendency of participants to bid more than rational agent theory prescribes, often at a significant loss. The prevailing explanation suggests that humans have limited cognitive abilities that make estimating the correct bid difficult, if not impossible. Using a series of auction structures, we found that bidding approaches rational agent predictions when participants compete against a computer. However, the winner's curse appears when participants compete against other humans, even when cognitive demands for the correct bidding strategy are removed. These results suggest the humans assign significant future value to victories over human but not over computer opponents even though such victories may incur immediate losses, and that this valuation anomaly is the origin of apparently irrational behavior.

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Bibliographic Info

Article provided by Society for Judgment and Decision Making in its journal Judgment and Decision Making.

Volume (Year): 3 (2008)
Issue (Month): 7 (October)
Pages: 483-492

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Handle: RePEc:jdm:journl:v:3:y:2008:i:7:p:483-492

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Related research

Keywords: auctions; winner's curse; bounded rationality.;

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Cited by:
  1. Nichols, Bridget Satinover, 2012. "The development, validation, and implications of a measure of consumer competitive arousal (CCAr)," Journal of Economic Psychology, Elsevier, vol. 33(1), pages 192-205.
  2. Malhotra, Deepak, 2010. "The desire to win: The effects of competitive arousal on motivation and behavior," Organizational Behavior and Human Decision Processes, Elsevier, vol. 111(2), pages 139-146, March.

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