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Star-shaped probability weighting functions and overbidding in first-price auctions

  • Armantier, Olivier
  • Treich, Nicolas

There is a debate about whether risk aversion is the main source of overbidding in a first-price independent private values auction. As an alternative, we adopt a non-expected utility framework, and identify an interpretable property on the probability weighting function which always induces overbidding.

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Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 104 (2009)
Issue (Month): 2 (August)
Pages: 83-85

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Handle: RePEc:eee:ecolet:v:104:y:2009:i:2:p:83-85
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  1. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
  2. Alain Chateauneuf & Michèle Cohen & Isaac Meilijson, 2004. "Four notions of mean preserving increase in risk, risk attitudes and applications to the Rank-Dependent Expected Utility model," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00212281, HAL.
  3. Drazen Prelec, 1998. "The Probability Weighting Function," Econometrica, Econometric Society, vol. 66(3), pages 497-528, May.
  4. Jacob K. Goeree & Charles A. Holt & Thomas R. Palfrey, 2000. "Quantal Response Equilibrium and Overbidding in Private-Value Auctions," Virginia Economics Online Papers 345, University of Virginia, Department of Economics.
  5. Schmidt, Ulrich & Zank, Horst, 2001. "A new axiomatization of rank-dependent expected utility with tradeoff consistency for equally likely outcomes," Journal of Mathematical Economics, Elsevier, vol. 35(4), pages 483-491, July.
  6. Hong, Chew Soo & Karni, Edi & Safra, Zvi, 1987. "Risk aversion in the theory of expected utility with rank dependent probabilities," Journal of Economic Theory, Elsevier, vol. 42(2), pages 370-381, August.
  7. Chew, Soo Hong, 1983. "A Generalization of the Quasilinear Mean with Applications to the Measurement of Income Inequality and Decision Theory Resolving the Allais Paradox," Econometrica, Econometric Society, vol. 51(4), pages 1065-92, July.
  8. Safra, Zvi & Segal, Uzi, 2001. "Rank-dependent preferences without ranking axioms," Journal of Mathematical Economics, Elsevier, vol. 35(4), pages 547-562, July.
  9. Luce, R Duncan & Fishburn, Peter C, 1991. " Rank- and Sign-Dependent Linear Utility Models for Finite First-Order Gambles," Journal of Risk and Uncertainty, Springer, vol. 4(1), pages 29-59, January.
  10. Harrison, Glenn W, 1990. "Risk Attitudes in First-Price Auction Experiments: A Bayesian Analysis," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 541-46, August.
  11. repec:hal:journl:halshs-00212281 is not listed on IDEAS
  12. Cox, James C & Smith, Vernon L & Walker, James M, 1985. "Experimental Development of Sealed-Bid Auction Theory: Calibrating Controls for Risk Aversion," American Economic Review, American Economic Association, vol. 75(2), pages 160-65, May.
  13. Landsberger, Michael & Meilijson, Isaac, 1990. "Lotteries, insurance, and star-shaped utility functions," Journal of Economic Theory, Elsevier, vol. 52(1), pages 1-17, October.
  14. Cox, James C & Smith, Vernon L & Walker, James M, 1988. " Theory and Individual Behavior of First-Price Auctions," Journal of Risk and Uncertainty, Springer, vol. 1(1), pages 61-99, March.
  15. Thomas Palfrey, 2002. "Quantal Response Equilibrium and Overbidding in Private Value Auctions," Theory workshop papers 357966000000000089, UCLA Department of Economics.
  16. Mich�le D. Cohen, 1995. "Risk-Aversion Concepts in Expected- and Non-Expected-Utility Models," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 20(1), pages 73-91, June.
  17. Yaari, Menahem E, 1987. "The Dual Theory of Choice under Risk," Econometrica, Econometric Society, vol. 55(1), pages 95-115, January.
  18. Wakker, Peter & Tversky, Amos, 1993. " An Axiomatization of Cumulative Prospect Theory," Journal of Risk and Uncertainty, Springer, vol. 7(2), pages 147-75, October.
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