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Ambiguity Aversion in First-Price Sealed-Bid Auctions

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  • Salo, Ahti A
  • Weber, Martin

Abstract

Experiments on first-price sealed-bid auctions with independent private values have shown that submitted bids typically exceed Nash-equilibrium predictions for risk-neutral bidders. Existing bidding models explains this phenomenon by assuming that the bidders are risk-averse and capable of drawing complete and correct inferences about their winning probabilities. In this article, we use the Choquet expected utility (CEU) theory to demonstrate that the observed bidding behavior can also be attributed to ambiguity aversion which causes the bidders to underestimate their chances of winning the auction. Empirical support for CEU bidding models is given through an analysis of recent bidding data. Copyright 1995 by Kluwer Academic Publishers

Suggested Citation

  • Salo, Ahti A & Weber, Martin, 1995. "Ambiguity Aversion in First-Price Sealed-Bid Auctions," Journal of Risk and Uncertainty, Springer, vol. 11(2), pages 123-137, September.
  • Handle: RePEc:kap:jrisku:v:11:y:1995:i:2:p:123-37
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    Citations

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    Cited by:

    1. Todd R. Kaplan & Shmuel Zamir, 2014. "Advances in Auctions," Discussion Papers 1405, Exeter University, Department of Economics.
    2. Levin, Dan & Ozdenoren, Emre, 2004. "Auctions with uncertain numbers of bidders," Journal of Economic Theory, Elsevier, vol. 118(2), pages 229-251, October.
    3. Chen, Yan & Katuscak, Peter & Ozdenoren, Emre, 2007. "Sealed bid auctions with ambiguity: Theory and experiments," Journal of Economic Theory, Elsevier, vol. 136(1), pages 513-535, September.
    4. Kerim Keskin, 2016. "Inverse S-shaped probability weighting functions in first-price sealed-bid auctions," Review of Economic Design, Springer;Society for Economic Design, vol. 20(1), pages 57-67, March.
    5. Vitali Gretschko & Alexander Rajko, 2015. "Excess information acquisition in auctions," Experimental Economics, Springer;Economic Science Association, vol. 18(3), pages 335-355, September.
    6. Thomas Gehrig & Werner Güth & René Levínský, 2016. "On the Value of Transparency and Information Acquisition in Bargaining," German Economic Review, Verein für Socialpolitik, vol. 17(3), pages 337-358, August.
    7. Luciano De Castro & Nicholas C. Yannelis, 2011. "Ambiguity aversion solves the conflict between efficiency and incentive compatibility," The School of Economics Discussion Paper Series 1106, Economics, The University of Manchester.
    8. Bodoh-Creed, Aaron L., 2012. "Ambiguous beliefs and mechanism design," Games and Economic Behavior, Elsevier, vol. 75(2), pages 518-537.
    9. Carvalho, M., 2011. "Essays in behavioral microeconomic theory," Other publications TiSEM 97fbb10e-5f12-420b-b8c4-e, Tilburg University, School of Economics and Management.
    10. Volij, Oscar, 2002. "Payoff equivalence in sealed bid auctions and the dual theory of choice under risk," Economics Letters, Elsevier, vol. 76(2), pages 231-237, July.
    11. Kaplan, Todd R. & Zamir, Shmuel, 2015. "Advances in Auctions," Handbook of Game Theory with Economic Applications, Elsevier.
    12. Turocy, Theodore L., 2008. "Auction choice for ambiguity-averse sellers facing strategic uncertainty," Games and Economic Behavior, Elsevier, vol. 62(1), pages 155-179, January.
    13. Ahmad, Husnain Fateh, 2015. "Endogenous price expectations as reference points in auctions," Journal of Economic Behavior & Organization, Elsevier, vol. 112(C), pages 46-63.
    14. Dominiak, Adam, 2013. "Iterated Choquet expectations: A possibility result," Economics Letters, Elsevier, vol. 120(2), pages 155-159.
    15. : Kostas Koufopoulos & : Roman Kozhan, 2012. "Optimal Insurance under Advserse Selection and Ambiguity Aversion," Working Papers wpn12-07, Warwick Business School, Finance Group.
    16. Ratan, Anmol, 2015. "Does displaying probabilities affect bidding in first-price auctions?," Economics Letters, Elsevier, vol. 126(C), pages 119-121.
    17. Yoo, Seung Han, 2014. "Learning a population distribution," Journal of Economic Dynamics and Control, Elsevier, vol. 48(C), pages 188-201.
    18. Lange, Andreas & Ratan, Anmol, 2010. "Multi-dimensional reference-dependent preferences in sealed-bid auctions - How (most) laboratory experiments differ from the field," Games and Economic Behavior, Elsevier, vol. 68(2), pages 634-645, March.
    19. Azrieli, Yaron & Teper, Roee, 2011. "Uncertainty aversion and equilibrium existence in games with incomplete information," Games and Economic Behavior, Elsevier, vol. 73(2), pages 310-317.
    20. Martin G. Kocher & Stefan T. Trautmann, 2013. "Selection Into Auctions For Risky And Ambiguous Prospects," Economic Inquiry, Western Economic Association International, vol. 51(1), pages 882-895, January.
    21. Carvalho, M., 2012. "Static vs Dynamic Auctions with Ambiguity Averse Bidders," Discussion Paper 2012-022, Tilburg University, Center for Economic Research.
    22. repec:spr:annopr:v:260:y:2018:i:1:d:10.1007_s10479-017-2416-4 is not listed on IDEAS
    23. Ellis, Andrew, 2016. "Condorcet meets Ellsberg," Theoretical Economics, Econometric Society, vol. 11(3), September.
    24. Nabil I. Al-Najjar & Luciano De Castro, 2010. "Uncertainty, Efficiency and Incentive Compatibility," Discussion Papers 1532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    25. Mingli Zheng & Chong Wang & Chaozheng Li, 2016. "Insurance Contracts with Adverse Selection When the Insurer Has Ambiguity about the Composition of the Consumers," Annals of Economics and Finance, Society for AEF, vol. 17(1), pages 179-206, May.

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