Can groups solve the problem of over-bidding in contests?

Abstract

This study reports an experiment that examines whether groups can better comply with theoretical predictions than individuals in contests. Our experiment replicates previous findings that individual players significantly overbid relative to theoretical predictions, incurring substantial losses. There is high variance in individual bids and strong heterogeneity across individual players. The new findings of our experiment are that groups make 25% lower bids, their bids have lower variance, and group bids are less heterogeneous than individual bids. Therefore, groups receive significantly higher and more homogeneous payoffs than individuals. We elicit individual and group preferences towards risk using simple lotteries. The results indicate that groups make less risky decisions, which is a possible explanation for lower bids in contests. Most importantly, we find that groups learn to make lower bids from communication and negotiation between group members.JEL Classifications: C72, C91, C92, D72

Are groups more rational than individuals? A review of interactive decision making in groups

“…In contrast, Casari, Zhang and Jackson 126 reported that in a company takeover experiment groups placed better bids than individuals and substantially reduced the winner's curse. Likewise, Sheremeta and Zhang 127 found less overbidding of groups in Tullock-contests than individuals, and Cheung and Palan 128 provided evidence that groups are less prone to create bubbles than individuals on a stock market based on a double auction mechanism.…”

Endowment effects in contests

“…This participation fee can be used to pay off any losses incurred during the series of contests. The P protocol has been used by Potters et al (1998), Anderson and Stafford (2003), Morgan et al (2008), and Sheremeta and Zhang (2009). Under the P protocol, each subject receives a small per-period endowment which can be used to make bids in that period of the experiment.…”

“…A number of studies have tried to identify means by which overbidding can be reduced. To date, researchers have found that overbidding decreases with the repetition of the contest (Davis and Reilly, 1998), groups make lower bids than individuals (Sheremeta and Zhang, 2009), and constraining individual endowments reduces overbidding (Sheremeta, 2009). This last study suggests that a portion of overbidding can be attributed to the size of the endowment i.e., endowment effects.…”

The adverse consequences of tournaments: Evidence from a field experiment

“…Millner and Pratt (1991) find that more risk-averse individuals exert lower levels of effort than less risk-averse subjects. This result has been replicated in a number of other experiments (Anderson and Freeborn, 2010;Sheremeta and Zhang, 2010;Sheremeta, 2011;Shupp et al, 2013).…”