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Bidding strategies and winner’s curse in auctions of non-distressed residential real estate

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  • Hungria Gunnelin, Rosane

    (Department of Real Estate and Construction Management, Royal Institute of Technology)

Abstract

This paper analyzes how listing price and bidding strategies impact sales prices in non-distressed residential real estate auctions. Furthermore, the paper is the first that tries to explicitly quantify how these strategies affect the probability of a winner’s curse in such auctions. The findings support the results in the general auction literature that the winning bid and the probability of a winner’s curse is increasing in the number of bidders. The results further supports the notion of “auction fever” since high paced auctions (where unexperienced bidders may resort to emotional bidding) increases selling price and the probability of a winner’s curse. The results with respect to jump bidding and list price setting are mixed. Jump bidding has the intended effect of scaring off bidders, but not sufficiently to reduce the winning bid and the probability of a winner’s curse. Lowering the list price to market value ratio (the degree of underpricing) increases the number of bidders, but not sufficiently to counteract the anchoring effect of the list price leading to a reduction of the winning bid and the probability of a winner’s curse. In summary, the findings in this paper show that the unfolding of auctions of non-distressed residential real estate has a significant impact on selling price and the probability of a winner’s curse.

Suggested Citation

  • Hungria Gunnelin, Rosane, 2020. "Bidding strategies and winner’s curse in auctions of non-distressed residential real estate," Working Paper Series 20/13, Royal Institute of Technology, Department of Real Estate and Construction Management & Banking and Finance.
    • Handle: RePEc:hhs:kthrec:2020_013
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    More about this item

    Keywords

    Housing; Auctions; List price; Bidding strategies; Winners curse;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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