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Loss aversion and learning to bid

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Author Info
Dennis A. V. Dittrich ()
Werner Güth ()
Martin Kocher
Paul Pezanis-Christou

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Abstract

Bidding challenges learning theories since experiences for the same bid vary stochastically: the same choice can result in a gain or a loss. In such an environment the question arises how the nearly universally documented phenomenon of loss aversion affects the adaptive dynamics. We analyze the impact of loss aversion in a simple auction for different learning theories. Our experimental results suggest that a version of reinforcement learning which accounts for loss aversion fares as well as more sophisticated alternatives.

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Paper provided by Max Planck Institute of Economics, Strategic Interaction Group in its series Papers on Strategic Interaction with number 2005-03.

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Length: 52 pages
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Handle: RePEc:esi:discus:2005-03

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Keywords: loss aversion; bidding; auction; experiment; learning;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
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  2. Ball, Sheryl B. & Bazerman, Max H. & Carroll, John S., 1991. "An evaluation of learning in the bilateral winner's curse," Organizational Behavior and Human Decision Processes, Elsevier, vol. 48(1), pages 1-22, February. [Downloadable!] (restricted)
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  4. Erev, Ido & Roth, Alvin E, 1998. "Predicting How People Play Games: Reinforcement Learning in Experimental Games with Unique, Mixed Strategy Equilibria," American Economic Review, American Economic Association, vol. 88(4), pages 848-81, September. [Downloadable!] (restricted)
  5. Judith Avrahami & Yaakov Kareev & Werner Güth, 2001. "Predating Predators: An experimental Study," Homo Oeconomicus, Institute of SocioEconomics, vol. 18, pages 337-351.
  6. Anderhub, Vital & Engelmann, Dirk & Guth, Werner, 2002. "An experimental study of the repeated trust game with incomplete information," Journal of Economic Behavior & Organization, Elsevier, vol. 48(2), pages 197-216, June. [Downloadable!] (restricted)
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  7. Benartzi, Shlomo & Thaler, Richard H, 1995. "Myopic Loss Aversion and the Equity Premium Puzzle," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 73-92, February. [Downloadable!] (restricted)
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  8. Colin Camerer & Teck-Hua Ho, 1999. "Experience-weighted Attraction Learning in Normal Form Games," Econometrica, Econometric Society, vol. 67(4), pages 827-874, July.
  9. Teck H Ho & Colin Camerer & Juin-Kuan Chong, 2003. "Functional EWA: A one-parameter theory of learning in games," Levine's Bibliography 506439000000000514, UCLA Department of Economics. [Downloadable!]
  10. Werner G¸th & Radosveta Ivanova-Stenzel & Manfred K–nigstein & Martin Strobel, 2003. "Learning to bid - an experimental study of bid function adjustments in auctions and fair division games," Economic Journal, Royal Economic Society, vol. 113(487), pages 477-494, 04. [Downloadable!] (restricted)
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  11. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
  12. Chris Starmer, 2000. "Developments in Non-expected Utility Theory: The Hunt for a Descriptive Theory of Choice under Risk," Journal of Economic Literature, American Economic Association, vol. 38(2), pages 332-382, June. [Downloadable!] (restricted)
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  14. Selten, Reinhard & Joachim Buchta, 1994. "Experimental Sealed Bid First Price Auctions with Directly Observed Bid Functions," Discussion Paper Serie B 270, University of Bonn, Germany.
  15. Gneezy, Uri & Potters, Jan, 1997. "An Experiment on Risk Taking and Evaluation Periods," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 631-45, May.
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  1. Nadine Chlass & Jens J. Krueger, 2007. "Small Sample Properties of the Wilcoxon Signed Rank Test with Discontinuous and Dependent Observations," Jena Economic Research Papers in Economics 2007-032, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics, Thueringer Universitaets- und Landesbibliothek. [Downloadable!]
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