Separating Bayesian Updating from Non-Probabilistic Reasoning: An Experimental Investigation

Levin, Dan; Peck, James; Ivanov, Asen

doi:10.1257/mic.20140008

“…17 In columns 9-12 we estimate the same model as in columns 5-8 but exclude the first 3 periods in each session. After excluding the first three periods, there is no significant learning over time for any value of β in any treatment.…”

Section: 16mentioning

confidence: 99%

Optimistic irrationality and overbidding in private value auctions

Georganas

¹

,

Levin

²

,

McGee

³

2017

Self Cite

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This is the accepted version of the paper.This version of the publication may differ from the final published version. Abstract Bidding one's value in a second-price, private-value auction is a weakly dominant solution (Vickrey, 1961), but repeated experimental studies find more overbidding than underbidding. We propose a model of optimistically irrational bidders who understand that there are possible gains and losses associated with higher bids but who may overestimate the additional probability of winning and/or underestimate the potential losses when bidding above value. These bidders may fail to discover the dominant strategy-despite the fact that the dominant strategy only requires rationality from bidders-but respond in a common sense way to out-of-equilibrium outcomes. By varying the monetary consequences of losing money in experimental auctions we observe more overbidding when the cost to losing money is low, and less overbidding when the cost is high. Our findings lend themselves to models in which less than fully rational bidders respond systematically to out-of-equilibrium incentives, and we find that our model better fits the effects of our manipulations than most of the existing models we consider. Permanent repository linkJEL classification: C92, D44, D82

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“…However, they focused on a different aspect of contingent reasoning, not directly related to the event of winning an auction. Finally, Levin, Peck, and Ivanov (2016) used Dutch auctions and showed that in this format conditioning on winning is more salient compared to a strategically equivalent first-price auction. All of these papers will be discussed in more detail in the following part.…”

Section: Literature Reviewmentioning

confidence: 99%

“…A value of 0 is equivalent to the usual Bayesian Nash Equilibrium, whereas a value of 1 corresponds to a setting in which the players do not assume any correlation between the actions of a player and his type, which is also denoted as fully cursed equilibrium. 1 2015; Levin, Peck, and Ivanov, 2016;Esponda and Vespa, 2016;Li, 2017).…”

Section: Introductionmentioning

confidence: 99%

Hypothetical thinking and the winner’s curse: an experimental investigation

Moser

¹

2019

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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

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“…A value of 0 is equivalent to the usual Bayesian Nash Equilibrium, whereas a value of 1 corresponds to a setting in which the players do not assume any correlation between the actions of a player and his type, which is also denoted as fully cursed equilibrium. 1 2015; Levin, Peck, and Ivanov, 2016;Esponda and Vespa, 2016;Li, 2017).…”

Section: Introductionmentioning

confidence: 99%

“…Additionally I only changed one parameter in stage II, whereas Koch and Penczynski (2014) used two different games, but with the same best-response functions and equilibria. Levin, Peck, and Ivanov (2016) used an experiment to investigate the impact of Bayesian updating and non-probabilistic reasoning (referred to as contingent reasoning in this paper) on avoiding the winner's curse. They used common value Dutch and common value first-price auctions based on the model in Kagel, Harstad, and Levin (1987) and compared both versions to quantify the effect of non-probabilistic reasoning.…”

mentioning

confidence: 99%

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

Moser

¹

2017

SSRN Journal

0

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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

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Separating Bayesian Updating from Non-Probabilistic Reasoning: An Experimental Investigation

Cited by 19 publications

References 24 publications

Optimistic irrationality and overbidding in private value auctions

Optimistic irrationality and overbidding in private value auctions

Hypothetical thinking and the winner’s curse: an experimental investigation

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

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