Hypothetical Thinking and the Winner's Curse: An Experimental Investigation

Abstract

There is evidence that bidders fall prey to the winner's curse because they fail to extract information from hypothetical events -like winning an auction. This paper investigates experimentally whether bidders in a common value auction perform better when the requirements for this cognitive issue -also denoted by contingent reasoning -are relaxed, leaving all other parameters unchanged. The overall pattern of the data suggests that the problem of irrational over-and underbidding can be weakened by giving the subjects ex ante feedback about their bid, but unlike related studies I also find negative effects of additional information.JEL-Classification: D03, D44, D82, D83, C91