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Knowing me, imagining you: Projection and overbidding in auctions

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  • Breitmoser, Yves

Abstract

Overbidding in auctions has been attributed to risk aversion, loser regret, level-k, and cursedness, though relying on different identifying assumptions. I argue that "type projection" organizes these findings and better captures observed behavior. Type projection formally models that people tend to believe others have object values similar to their own -- a robust psychological phenomenon that naturally applies to auctions. First, I show that type projection implies the main behavioral phenomena in auctions, including increased sense of competition (like loser regret) and broken Bayesian updating (like cursedness). Second, re-analyzing data from seven experiments, I show that type projection explains the stylized facts of behavior across private and common value auctions. Third, in a structural analysis nesting existing approaches and emphasizing robustness, type projection consistently captures behavior best, in-sample and out-of-sample. The results reconcile bidding patterns across conditions and have implications for behavioral and empirical analyses as well as policy.

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  • Breitmoser, Yves, 2016. "Knowing me, imagining you: Projection and overbidding in auctions," MPRA Paper 68981, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:68981
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    8. Sebastian Fehrler & Baiba Renerte & Irenaeus Wolff, 2020. "Beliefs about Others: A Striking Example of Information Neglect," TWI Research Paper Series 118, Thurgauer Wirtschaftsinstitut, Universität Konstanz.
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    More about this item

    Keywords

    auctions; overbidding; winner's curse; projection; risk aversion; cursed equilibrium; limited depth of reasoning;
    All these keywords.

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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