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Can Relaxation of Beliefs Rationalize the Winner’s Curse?: An Experimental Study

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  • Asen Ivanov

    ()
    (Department of Economics, VCU School of Business)

  • Dan Levin

    ()
    (Department of Economics, The Ohio State University)

  • Muriel Niederle

    ()
    (Stanford University)

Abstract

We use a second-price common-value auction, the maximal game, to experimentally study whether the Winner’s Curse (WC) can be explained by models which retain best-response behavior but allow for inconsistent beliefs. In the maximal game, the WC can be rationalized only by a belief that others use weakly-dominated strategies. Yet, we find that the WC is widespread. In addition, we create environments where, regardless of beliefs, there should be a correction of the WC. We find little evidence of such a correction. Overall, our study suggests that the WC, at least in initial periods of play in the laboratory, represents a more fundamental departure from NE than a mere inconsistency of beliefs.

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Bibliographic Info

Paper provided by VCU School of Business, Department of Economics in its series Working Papers with number 0803.

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Publication status: Forthcoming in Econometrica
Handle: RePEc:vcu:wpaper:0803

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Keywords: common-value auctions; winner’s curse; beliefs; cursed equilibrium; level-k model; quantal response equilibrium;

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References

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  1. Erik Eyster & Matt Rabin, 2003. "Cursed Equilibrium," Method and Hist of Econ Thought 0303002, EconWPA.
  2. Vincent P Crawford & Nagore Iriberri, 2007. "Level-k Auctions: Can a Non-Equilibrium Model of Strategic Thinking Explain the Winner's Curse and Overbidding in Private-Value Auctions?," Levine's Bibliography 321307000000001005, UCLA Department of Economics.
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  8. Asen Ivanov & Dan Levin & James Peck, 2008. "Hindsight, Foresight, and Insight: An Experimental Study of a Small-Market Investment Game with Common and Private Values," Working Papers 0801, VCU School of Business, Department of Economics.
  9. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
  10. Hendricks, Kenneth & Porter, Robert H & Boudreau, Bryan, 1987. "Information, Returns, and Bidding Behavior in OCS Auctions: 1954-1969," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 517-42, June.
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  12. Wolfgang Pesendorfer & Jeroen M. Swinkels, 1997. "The Loser's Curse and Information Aggregation in Common Value Auctions," Econometrica, Econometric Society, vol. 65(6), pages 1247-1282, November.
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Cited by:
  1. Agranov, Marina & Potamites, Elizabeth & Schotter, Andrew & Tergiman, Chloe, 2012. "Beliefs and endogenous cognitive levels: An experimental study," Games and Economic Behavior, Elsevier, vol. 75(2), pages 449-463.
  2. Nadine Chlaß, 2011. "On Individual Cursedness - How personality shapes individuals' sensitivity to incur a winner's curse -," Jena Economic Research Papers 2011-027, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
  3. Sanjit Dhami & Ali al-Nowaihi, 2013. "Evidential equilibria: Heuristics and biases in static games," Discussion Papers in Economics 13/25, Department of Economics, University of Leicester.
  4. Brocas, Isabelle & Carrillo, Juan D & Castro, Manuel, 2010. "The nature of information and its effect on bidding behavior: laboratory evidence in a common value auction," CEPR Discussion Papers 7848, C.E.P.R. Discussion Papers.
  5. Nobuyuki Hanaki & Nicolas Jacquemet & Stéphane Luchini & Adam Zylbersztejn, 2013. "Bounded Rationality and Strategic Uncertainty in a Simple Dominance Solvable Game," Economics Discussion / Working Papers 13-14, The University of Western Australia, Department of Economics.
  6. Alistair J. Wilson & Emanuel Vespa, 2012. "Communication With Multiple Senders and Multiple Dimensions: An Experiment," Working Papers 384, University of Pittsburgh, Department of Economics, revised Mar 2012.
  7. Qin, Xiangdong & Zhang, Fangzhou, 2013. "Using clock auctions to dissolve partnership: An experimental study," Economics Letters, Elsevier, vol. 119(1), pages 55-59.
  8. Alistair J. Wilson & Emanuel Vespa, 2012. "Communication With Multiple Senders and Multiple Dimensions: An Experiment," Working Papers 401, University of Pittsburgh, Department of Economics, revised Mar 2012.
  9. Sotiris Georganas & Paul J. Healy & Roberto A. Weber, 2014. "On the Persistence of Strategic Sophistication," CESifo Working Paper Series 4653, CESifo Group Munich.
  10. Vincent P. Crawford & Miguel A. Costa-Gomes & Nagore Iriberri, 2010. "Strategic Thinking," Levine's Working Paper Archive 661465000000001148, David K. Levine.
  11. Brünner, Tobias & Becker, Alice, 2013. "Bidding in common value fair division games," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79810, Verein für Socialpolitik / German Economic Association.

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