The value of victory: social origins of the winner’s curse in common value auctions
Journal Title: Judgment and Decision Making - Year 2008, Vol 3, Issue 7
Abstract
Auctions, normally considered as devices facilitating trade, also provide a way to probe mechanisms governing one’s valuation of some good or action. One of the most intriguing phenomena in auction behavior is the winner’s curse — the strong tendency of participants to bid more than rational agent theory prescribes, often at a significant loss. The prevailing explanation suggests that humans have limited cognitive abilities that make estimating the correct bid difficult, if not impossible. Using a series of auction structures, we found that bidding approaches rational agent predictions when participants compete against a computer. However, the winner’s curse appears when participants compete against other humans, even when cognitive demands for the correct bidding strategy are removed. These results suggest the humans assign significant future value to victories over human but not over computer opponents even though such victories may incur immediate losses, and that this valuation anomaly is the origin of apparently irrational behavior.
Authors and Affiliations
Wouter van den Bos, Jian Li, Tatiana Lau, Eric Maskin, Jonathan D. Cohen, P. Read Montague, and Samuel M. McClure
MARTER: Markov True and Error Model of Drifting Parameters
This paper describes a theory of the variability of risky choice that describes empirical properties of choice data, including sequential effects and systematic violations of response independence. The Markov True and Er...
The influence of group decision making on indecisiveness-related decisional confidence
Indecisiveness is an individual difference measure of chronic difficulty and delay in decision making. Indecisiveness is associated with low decisional confidence and distinct patterns of pre-choice information search be...
Affect, risk perception and future optimism after the tsunami disaster
Environmental events such as natural disasters may influence the public's affective reactions and decisions. Shortly after the 2004 Tsunami disaster we assessed how affect elicited by thinking about this disaster influen...
The effectiveness of imperfect weighting in advice taking
We investigate decision-making in the Judge-Advisor-System where one person, the “judge”, wants to estimate the number of a certain entity and is given advice by another person. The question is how to combine the judge’s...
A re-examination of the effect of contextual group size on people’s attitude to risk
Using Kahneman and Tversky’s life-death decision paradigm, Wang and colleagues (e.g., Wang & Johnston, 1995; Wang, 1996a, 1996b, 1996c, 2008; Wang et al., 2001) have shown two characteristic phenomena regarding people’s...