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Loss Aversion, Expectations and Anchoring in the BDM Mechanism

Author

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  • Vassilopoulos, Achilleas
  • Drichoutis, Andreas C.
  • Nayga, Rodolfo

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).

Suggested Citation

  • Vassilopoulos, Achilleas & Drichoutis, Andreas C. & Nayga, Rodolfo, 2018. "Loss Aversion, Expectations and Anchoring in the BDM Mechanism," MPRA Paper 85635, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:85635
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    Cited by:

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    3. Maurizio Canavari & Andreas C. Drichoutis & Jayson L. Lusk & Rodolfo M. Nayga, Jr., 2018. "How to run an experimental auction: A review of recent advances," Working Papers 2018-5, Agricultural University of Athens, Department Of Agricultural Economics.
    4. Gosnell, Greer & McCoy, Daire, 2023. "Market failures and willingness to accept smart meters: Experimental evidence from the UK," Journal of Environmental Economics and Management, Elsevier, vol. 118(C).

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    More about this item

    Keywords

    Becker-DeGroot-Marschak (BDM) mechanism; expectations; anchoring; valuation; experiment;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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