Regret in auctions: theory and evidence
The sealed-bid first-price auction of a single object in the case of independent privately-known values is the simplest auction setting and understanding it is important for understanding more complex mechanisms. But bidders bid above the risk-neutral Nash equilibrium theory prediction. The reasons for this “over bidding” remain an unsolved puzzle. Several explanations have been offered, including risk aversion, social comparisons, and learning. We present a new explanation based on regret and a model that explains not only the observed over bidding in sealed-bid first-price auctions, but also behavior in several other settings that is inconsistent with risk aversion.
KeywordsAuctions Competitive bidding Regret Risk-aversion Learning Experimental economics
JEL Classification NumbersD44 C91
Unable to display preview. Download preview PDF.
- Cason T.N. (1995) An experimental investigation of the seller incentives in the EPA’s emission trading auction. Am. Econ Review 85(4): 905–922Google Scholar
- Engelbrecht-Wiggans R. (1989) The effect of regret on optimal bidding in auctions. Manage Sci 35(6): 685–692Google Scholar
- Engelbrecht-Wiggans R., Katok E. (2005) Experiments on auction valuation and endogenous entry. In: Morgan J. (eds) Experimental and Behavior Economics, Advances in Applied Microeconomics, vol. 13, Chap 7. Amsterdam, Elsevier, pp. 171–196Google Scholar
- Engelbrecht-Wiggans, R., Katok, E.: Regret and Feedback Information in First-Price Sealed-Bid Auctions. Penn State working paper http://lema.smeal.psu.edu/katok/regret_post.pdf (2006)Google Scholar
- Kagel J.H. (1995) Auctions: A Survey of Experimental Research. In: Kagel J.H. Roth A.E. (eds) The Handbook of Experimental Economics. Princeton, Princeton University Press, pp 501–585Google Scholar
- Morgan, J., Stiglitz, K., Reis, G.: The spite motive and equilibrium behavior in auctions. Contrib Econ Anal Policy 2(1), article 5 (2003)Google Scholar
- Selten R., Buchta J. (1998) Experimental sealed bid first-price auctions with directly observed bid functions. In: Budescu D. Erev I. Zwick R. (eds) Games and Human Behavior: Essays in honor of Amnon Rapoport. Mahwah, Lawrence Erlbaum Associates, pp 105–142Google Scholar