Regret and Feedback Information in First-Price Sealed-Bid Auctions

We investigate the effect of regret-related feedback information on bidding behavior in sealed-bid first-price auctions. Two types of regret are possible in this auction format. A winner of the auction may regret paying too much relative to the second highest bid, and a loser may regret missing an opportunity to win at a favorable price. In theory, under very general conditions, being sensitive to winning and paying too much should result in lower average bids, and being sensitive to missing opportunities to win at a favorable price should result in higher bids. For example, the U.S. Government's policy of revealing losing bids may cause regret-sensitive bidders to anticipate regret and bid conservatively, decreasing the government's revenue. We test these predictions in the laboratory and find strong support for both.

[1]  J. Kagel,et al.  Handbook of Experimental Economics , 1997 .

[2]  Leonard J. Savage,et al.  The Theory of Statistical Decision , 1951 .

[3]  Radosveta Ivanova-Stenzel,et al.  Revenue equivalence revisited , 2008, Games Econ. Behav..

[4]  KatokElena,et al.  Learning by Doing in the Newsvendor Problem , 2008 .

[5]  Elena Katok,et al.  Experiments on Auction Valuation and Endogenous Entry , 2004 .

[6]  John H. Kagel,et al.  Testing between alternative models of choice under uncertainty: Some initial results , 1990 .

[7]  A. Tversky,et al.  Prospect theory: analysis of decision under risk , 1979 .

[8]  J. Morgan,et al.  The Spite Motive and Equilibrium Behavior in Auctions , 2003 .

[9]  Nicolas Treich,et al.  Overbidding in Independant Private-Values Auctions and Misperception of Probabilities , 2006 .

[10]  Nicolas Treich,et al.  Subjective Probabilities in Games: An Application to the Overbidding Puzzle , 2009 .

[11]  D. Malhotra,et al.  Towards a competitive arousal model of decision-making: A study of auction fever in live and Internet auctions , 2005 .

[12]  Robert E. Dorsey,et al.  Explaining Overbidding in First Price Auctions Using Controlled Lotteries , 2003 .

[13]  Duncan James,et al.  Just Who Are You Calling Risk Averse? , 2000 .

[14]  M. Dufwenberg,et al.  Information disclosure in auctions: an experiment , 2002 .

[15]  A. Tversky,et al.  Prospect theory: an analysis of decision under risk — Source link , 2007 .

[16]  Elena Katok,et al.  A Direct Test of Risk Aversion and Regret in First Price Sealed-Bid Auctions , 2009, Decis. Anal..

[17]  R. Selten,et al.  Experimental Sealed Bid First Price Auctions with Directly Observed Bid Functions , 1994 .

[18]  P. Schoemaker.  Experiments on Decisions under Risk: The Expected Utility Hypothesis , 1980 .

[19]  M. Degroot,et al.  Measuring utility by a single-response sequential method. , 1964, Behavioral science.

[20]  Erkut Y. Ozbay,et al.  Auctions with Anticipated Regret: Theory and Experiment , 2007 .

[21]  David E. Bell,et al.  Risk Premiums for Decision Regret , 1983 .

[22]  Robert Sugden,et al.  Are Preferences Monotonic? Testing Some Predictions of Regret Theory , 1992 .

[23]  Robert Sugden,et al.  Testing for juxtaposition and event-splitting effects , 1993 .

[24]  David E. Bell,et al.  Regret in Decision Making under Uncertainty , 1982, Oper. Res..

[25]  Axel Ockenfels,et al.  Impulse balance equilibrium and feedback in first price auctions , 2002, Games Econ. Behav..

[26]  M. Allais.  Le comportement de l'homme rationnel devant le risque : critique des postulats et axiomes de l'ecole americaine , 1953 .

[27]  R. Sugden,et al.  Regret Theory: An alternative theory of rational choice under uncertainty Review of Economic Studies , 1982 .

[28]  T. Cason.  An Experimental Investigation of the Seller Incentives in the EPA's Emission Trading Auction , 1995 .

[29]  Gary E. Bolton,et al.  ERC: A Theory of Equity, Reciprocity, and Competition , 2000 .

[30]  Elena Katok,et al.  Experiments on Auction Valuation and Endogenous Entry , 2004 .

[31]  R. Mark Isaac,et al.  Information and conspiracy in sealed bid auctions , 1985 .

[32]  Gary E. Bolton,et al.  Learning-by-Doing in the Newsvendor Problem: A Laboratory Investigation of the Role of Experience and Feedback , 2008, Manuf. Serv. Oper. Manag..

[33]  Elena Katok,et al.  Regret in auctions: theory and evidence , 2007 .

[34]  Richard Engelbrecht-Wiggans,et al.  The effect of regret on optimal bidding in auctions , 1989 .

[35]  J. Kagel,et al.  Auctions: A Survey of Experimental Research, 1995 - 2008* , 2008 .

[36]  C. Plott,et al.  Economic Theory of Choice and the Preference Reversal Phenomenon , 1979 .

[37]  R. Engelbrecht-Wiggans,et al.  A Comparison of Buyer-Determined and Price-Based Multiattribute Mechanisms , 2007 .

[38]  Sunju Park,et al.  An Elementary Introduction to Auctions , 2001, Interfaces.

[39]  David E. Bell,et al.  Disappointment in Decision Making Under Uncertainty , 1985, Oper. Res..

[40]  J. Kagel,et al.  Independent Private Value Auctions: Bidder Behaviour in First-, Second- and Third-Price Auctions with Varying Numbers of Bidders , 1993 .

[41]  V. Smith,et al.  Theory and individual behavior of first-price auctions , 1988 .

[42]  A. Tversky,et al.  Prospect Theory : An Analysis of Decision under Risk Author ( s ) : , 2007 .