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Separating probability weighting and risk aversion in first-price auctions

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  • Haruvy, Ernan
  • Heinrich, Timo
  • Walker, Matthew J.

Abstract

In first price sealed-bid auctions, a power probability weighting function is observationally equivalent to a model with constant relative risk aversion. By comparing auctions with different ceilings on a computerized opponent’s bid space, we can separate inverse S-shaped probability weighting as commonly used in the literature and risk-averse preferences from the distribution of observed bids. We find evidence to support both theories in the data. However, we also observe a significant number of violations after accounting for decision noise, which suggest that bidders’ valuations may be malleable to cues of the auction environment.

Suggested Citation

  • Haruvy, Ernan & Heinrich, Timo & Walker, Matthew J., 2022. "Separating probability weighting and risk aversion in first-price auctions," Economics Letters, Elsevier, vol. 221(C).
    • Handle: RePEc:eee:ecolet:v:221:y:2022:i:c:s0165176522003652
    DOI: 10.1016/j.econlet.2022.110891
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    References listed on IDEAS

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    Cited by:

    1. Brosig-Koch, Jeannette & Heinrich, Timo & Sterner, Martin, 2023. "Bilateral communication in procurement auctions," MPRA Paper 117612, University Library of Munich, Germany.

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    More about this item

    Keywords

    Bias; Experiment; First-price auctions; Probability weighting; Risk aversion;
    All these keywords.

    JEL classification:

    • C57 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Econometrics of Games and Auctions
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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