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Hypothetical thinking and the winner's curse: An experimental investigation

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  • Johannes Moser

Abstract

There is evidence that bidders fall prey to the winner's curse because they fail to extract information from hypothetical events - like winning an auction. This paper investigates experimentally whether bidders in a common value auction perform better when the requirements for this cognitive issue - also denoted by contingent reasoning - are relaxed, leaving all other parameters unchanged. The overall pattern of the data suggests that the problem of irrational over- and underbidding can be weakened by giving the subjects ex ante feedback about their bid, but unlike related studies I also find negative effects of additional information.

Suggested Citation

  • Johannes Moser, 2017. "Hypothetical thinking and the winner's curse: An experimental investigation," Working Papers 176, Bavarian Graduate Program in Economics (BGPE).
  • Handle: RePEc:bav:wpaper:176_moser
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    File URL: http://www.bgpe.de/texte/DP/176_Moser.pdf
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    References listed on IDEAS

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    3. Miguel A. Costa‐Gomes & Makoto Shimoji, 2015. "A Comment on “Can Relaxation of Beliefs Rationalize the Winner's Curse?: An Experimental Study”," Econometrica, Econometric Society, vol. 83, pages 375-383, January.
    4. Camerer, Colin & Nunnari, Salvatore & Palfrey, Thomas R., 2016. "Quantal response and nonequilibrium beliefs explain overbidding in maximum-value auctions," Games and Economic Behavior, Elsevier, vol. 98(C), pages 243-263.
    5. Thaler, Richard H, 1988. "Anomalies: The Winner's Curse," Journal of Economic Perspectives, American Economic Association, vol. 2(1), pages 191-202, Winter.
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    More about this item

    Keywords

    Hypothetical thinking; cursed equilibrium; winner's curse;

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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