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Loss Aversion and Competition in Vickrey Auctions: Money Ain't No Good

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  • Rosato, Antonio
  • Tymula, Agnieszka

Abstract

We present results from an experiment with a within-subject design aimed at testing a unique prediction of expectations-based reference-dependent preferences and loss aversion in private-value second-price (Vickrey) auctions. If bidders have expectationsbased reference-dependent preferences, the total number of participants in an auction should affect bids in auctions for real objects but not in auctions with induced monetary values. Our findings are consistent with expectations-based reference-dependent preferences and loss aversion. In real-object auctions, subjects' bids are affected by the number of competitors and, on average, they decline with the intensity of competition. In induced-value auctions, instead, bids are unaffected by the intensity of competition. We also successfully replicate an experiment from Sprenger (2015) aimed at distinguishing expectations-based loss aversion from models of Disappointment Aversion. This provides additional evidence that our findings in the auction experiments are due to expectations-based loss aversion.

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  • Rosato, Antonio & Tymula, Agnieszka, 2016. "Loss Aversion and Competition in Vickrey Auctions: Money Ain't No Good," MPRA Paper 69331, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:69331
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    Cited by:

    1. Ji Yong Lee & Rodolfo M. Nayga & Cary Deck & Andreas C. Drichoutis, 2020. "Cognitive Ability and Bidding Behavior in Second Price Auctions: An Experimental Study," American Journal of Agricultural Economics, John Wiley & Sons, vol. 102(5), pages 1494-1510, October.
    2. Aurélien Baillon & Han Bleichrodt & Vitalie Spinu, 2020. "Searching for the Reference Point," Management Science, INFORMS, vol. 66(1), pages 93-112, January.
    3. Karle, Heiko & Schumacher, Heiner & Vølund, Rune, 2023. "Consumer loss aversion and scale-dependent psychological switching costs," Games and Economic Behavior, Elsevier, vol. 138(C), pages 214-237.
    4. Kim, Dong-Hyuk & Ratan, Anmol, 2022. "Disentangling risk aversion and loss aversion in first-price auctions: An empirical approach," European Economic Review, Elsevier, vol. 150(C).
    5. Heiko Karle & Dirk Engelmann & Martin Peitz, 2022. "Student performance and loss aversion," Scandinavian Journal of Economics, Wiley Blackwell, vol. 124(2), pages 420-456, April.
    6. Aurélien Baillon & Han Bleichrodt & Vitalie Spinu, 2020. "Searching for the Reference Point," Management Science, INFORMS, vol. 66(1), pages 93-112, January.
    7. Jetlir Duraj, 2018. "Mechanism Design with News Utility," Papers 1808.04020, arXiv.org.
    8. Guo, Julie & Tymula, Agnieszka, 2021. "Waterfall illusion in risky choice – exposure to outcome-irrelevant gambles affects subsequent valuation of risky gambles," European Economic Review, Elsevier, vol. 139(C).
    9. von Wangenheim, Jonas, 2019. "English versus Vickrey auctions with loss averse bidders," Discussion Papers 2019/1, Free University Berlin, School of Business & Economics.
    10. Benjamin Balzer & Antonio Rosato, 2018. "Expectations-Based Loss Aversion in Common-Value Auctions: Extensive vs. Intensive Risk," Working Paper Series 50, Economics Discipline Group, UTS Business School, University of Technology, Sydney.
    11. Mariano Gabriel Runco, 2020. "Reference-Dependent Preferences and Overbidding in Private and Common Value Auctions," International Journal of Applied Behavioral Economics (IJABE), IGI Global, vol. 9(2), pages 20-37, April.
    12. Drichoutis, Andreas C. & Nayga, Rodolfo M., 2022. "Game form recognition in preference elicitation, cognitive abilities, and cognitive load," Journal of Economic Behavior & Organization, Elsevier, vol. 193(C), pages 49-65.
    13. Benjamin Balzer & Antonio Rosato & Jonas von Wangenheim, 2020. "Dutch versus First-Price Auctions with Dynamic Expectations-Based Reference-Dependent Preferences," Working Paper Series 2020/05, Economics Discipline Group, UTS Business School, University of Technology, Sydney.
    14. Andreas C. Drichoutis & Stathis Klonaris & Georgia Papoutsi, 2016. "Do good things come in small packages? Willingness to pay for pomegranate wine and bottle size effects," Working Papers 2016-2, Agricultural University of Athens, Department Of Agricultural Economics.
    15. Fu, Qiang & Lyu, Youji & Wu, Zenan & Zhang, Yuanjie, 2022. "Expectations-based loss aversion in contests," Games and Economic Behavior, Elsevier, vol. 133(C), pages 1-27.
    16. von Wangenheim, Jonas, 2021. "English versus Vickrey auctions with loss-averse bidders," Journal of Economic Theory, Elsevier, vol. 197(C).
    17. Benjamin Balzer & Antonio Rosato, 2021. "Expectations-Based Loss Aversion in Auctions with Interdependent Values: Extensive vs. Intensive Risk," Management Science, INFORMS, vol. 67(2), pages 1056-1074, February.
    18. Balzer, Benjamin & Rosato, Antonio & von Wangenheim, Jonas, 2022. "Dutch vs. first-price auctions with expectations-based loss-averse bidders," Journal of Economic Theory, Elsevier, vol. 205(C).
    19. Maurizio Canavari & Andreas C. Drichoutis & Jayson L. Lusk & Rodolfo M. Nayga, Jr., 2018. "How to run an experimental auction: A review of recent advances," Working Papers 2018-5, Agricultural University of Athens, Department Of Agricultural Economics.
    20. Rosato, Antonio & Tymula, Agnieszka, 2022. "A novel experimental test of truthful bidding in second-price auctions with real objects," MPRA Paper 115427, University Library of Munich, Germany.
    21. Fu, Qiang & Wang, Xiruo & Zhu, Yuxuan, 2021. "Multi-prize contests with expectation-based loss-averse players," Economics Letters, Elsevier, vol. 205(C).
    22. Fugger, Nicolas & Gillen, Philippe & Riehm, Tobias, 2019. "Procurement design with loss averse bidders," ZEW Discussion Papers 19-060, ZEW - Leibniz Centre for European Economic Research.

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    More about this item

    Keywords

    Auctions; Reference-Dependent Preferences; Loss Aversion; Expectations;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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