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Mental Processes & Strategic Equilibration: An fMRI Study of Selling Strategy in Second Price Auctions

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  • Grether, David
  • Plott, Charles
  • Rowe, Daniel
  • Sereno, Martin
  • Allman, John

Abstract

This study is the first to attempt to isolate a relationship between cognitive activity and equilibration to a Nash Equilibrium. Subjects, while undergoing fMRI scans of brain activity, participated in second price auctions against a single competitor following predetermined strategy that was unknown to the subject. For this auction there is a unique strategy that will maximize the subjects' earnings, which is also a Nash equilibrium of the associated game theoretic model of the auction. As is the case with all games, the bidding strategies of subjects participating in second price auctions most often do not reflect the equilibrium bidding strategy at first but with experience, typically exhibit a process of equilibration, or convergence toward the equilibrium. This research is focused on the process of convergence. In the data reported here subjects participated in sixteen auctions, after which all subjects were told the strategy that will maximize their revenues, the theoretical equilibrium. Following that announcement, sixteen more auctions were performed. The question posed by the research concerns the mental activity that might accompany equilibration as it is observed in the bidding behavior. Does brain activation differ between equilibrated and non-equilibrated in the sense of a bidding strategy? If so, are their differences in the location of activation during and after equilibration? We found significant activation in the frontal pole especially in Brodmann's area 10, the anterior cingulate cortex, the amygdala and the basal forebrain. There was significantly more activation in the basal forebrain and the anterior cingulate cortex during the first sixteen auctions than in the second sixteen. The activity in the amygdala shifted from the right side to the left after the solution was given.

Suggested Citation

  • Grether, David & Plott, Charles & Rowe, Daniel & Sereno, Martin & Allman, John, 2004. "Mental Processes & Strategic Equilibration: An fMRI Study of Selling Strategy in Second Price Auctions," Working Papers 1189, California Institute of Technology, Division of the Humanities and Social Sciences.
  • Handle: RePEc:clt:sswopa:1189
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    Keywords

    auctions; strategy; imaging;

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