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A Naïve Approach to Bidding

Author

Listed:
  • Paul Pezanis-Christou

    (School of Economics, University of Adelaide)

  • Hang Wu

    (Centre for Behavioural Economics, National University of Singapore)

Abstract

We propose a novel approach to the modelling of bidding behavior in pay-your-bid auctions that builds on the presumption that bidders are mostly concerned with losing an auction if they happen to have the highest signal. Our models assume risk neutrality, no profit maximization and no belief about competitors' behavior. They may entail overbidding in first-price and all-pay auctions and we discuss conditions for the revenue equivalence of standard pay-your-bid auctions to hold. We fit the models to the data of first-price auction experiments and find that they do at least as well as Vickreys benchmark model for risk neutral bidders. Assuming probability misperception or impulse weighting (when relevant) improves their goodness-of-fit and leads to very similar revenue predictions. An analysis of individuals' heterogeneous behavioral traits suggests that impulse weighting is a more consistent rationale for the observed behavior than a power form of probability misperception.

Suggested Citation

  • Paul Pezanis-Christou & Hang Wu, 2017. "A Naïve Approach to Bidding," School of Economics and Public Policy Working Papers 2017-03, University of Adelaide, School of Economics and Public Policy.
    • Handle: RePEc:adl:wpaper:2017-03
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    File URL: https://media.adelaide.edu.au/economics/papers/doc/wp2017-03.pdf
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    References listed on IDEAS

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    Cited by:

    1. Werner Güth & Paul Pezanis-Christou, 2017. "An evolutionary analysis of bidding behaviour in fair division games," School of Economics and Public Policy Working Papers 2017-12, University of Adelaide, School of Economics and Public Policy.

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    More about this item

    Keywords

    first-price auctions; all-pay auctions; impulse balance equilibrium; overbidding; bounded rationality; probability distortion; regret; experiments.;
    All these keywords.

    JEL classification:

    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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