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When the Economics of a Decision Matters More than the Psychology of the Decision: Understanding the Economic Significance of Auction Fever

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  • Matthew W. McCarter

    () (College of Business, University of Texas at San Antonio and Economic Science Institute, Chapman University)

  • Abel M. Winn

    () (Argyros School of Business & Economics, Chapman University)

Abstract

This article uses archival data from English auctions of animal art and eBay gift cards coupled with two laboratory experiments to study the effect of financial stakes on an interdependent decision-making phenomenon critical to organizational success: auction fever. Congruent with rational irrationality theory, we find evidence that the frequency and severity of auction fever decreases as the stakes increase, calling into question the economic significance of the phenomenon. In Study 1, we used two archival field datasets to show that the frequency and magnitude of overbidding decrease as the bidder’s willingness to pay increases. In Study 2 a laboratory experiment replicated this finding as winners make up a minority (only 15.2%) of overbidders, making losers (who incur no cost for overbidding) four-and-half times more likely to experience “auction fever”. In Study 3, we compare the frequency of auction fever between an English auction institution (where only the winner pays) and penny auction institution (where every bidder pays) – and find that the frequency of auction fever declines from 33% in English auctions to 12.7% in penny auctions. In contrast to the English auctions, bidders in the penny auction were more likely to spend beyond their initial limits when their (perceived) item values were higher; this occurs because the cost of each additional bid is smaller relative to the perceived value of the item. These results demonstrate that financial stakes of a decision may override seemingly robust psychological processes and they encourage researchers to test their ideas in contexts where the economic significance of a decision is considerable.

Suggested Citation

  • Matthew W. McCarter & Abel M. Winn, 2013. "When the Economics of a Decision Matters More than the Psychology of the Decision: Understanding the Economic Significance of Auction Fever," Working Papers 13-19, Chapman University, Economic Science Institute.
  • Handle: RePEc:chu:wpaper:13-19
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    References listed on IDEAS

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    1. Deirdre N. McCloskey & Stephen T. Ziliak, 1996. "The Standard Error of Regressions," Journal of Economic Literature, American Economic Association, vol. 34(1), pages 97-114, March.
    2. Brennan C. Platt & Joseph Price & Henry Tappen, 2010. "Pay-to-Bid Auctions," NBER Working Papers 15695, National Bureau of Economic Research, Inc.
    3. Jones, Matthew T., 2011. "Bidding fever in eBay auctions of Amazon.com gift certificates," Economics Letters, Elsevier, vol. 113(1), pages 5-7, October.
    4. Ehrhart, Karl-Martin & Ott, Marion & Abele, Susanne, 2008. "Auction Fever: Theory and Experimental Evidence," Sonderforschungsbereich 504 Publications 08-27, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    5. Robert Slonim & Alvin E. Roth, 1998. "Learning in High Stakes Ultimatum Games: An Experiment in the Slovak Republic," Econometrica, Econometric Society, vol. 66(3), pages 569-596, May.
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    7. Bryan Caplan, 2000. "Rational Irrationality: A Framework for the Neoclassical-Behavioral Debate," Eastern Economic Journal, Eastern Economic Association, vol. 26(2), pages 191-211, Spring.
    8. Malhotra, Deepak, 2010. "The desire to win: The effects of competitive arousal on motivation and behavior," Organizational Behavior and Human Decision Processes, Elsevier, vol. 111(2), pages 139-146, March.
    9. Philip A. Haile & Elie Tamer, 2003. "Inference with an Incomplete Model of English Auctions," Journal of Political Economy, University of Chicago Press, vol. 111(1), pages 1-51, February.
    10. Caplan, Bryan, 2001. "Rational Ignorance versus Rational Irrationality," Kyklos, Wiley Blackwell, vol. 54(1), pages 3-26.
    11. Vernon L. Smith, 1994. "Economics in the Laboratory," Journal of Economic Perspectives, American Economic Association, vol. 8(1), pages 113-131, Winter.
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    Keywords

    Auction Fever; Bidder’s Curse; Economic Significance; English Auction; Overbidding; Penny Auction; Statistical Significance;

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