Experimental Economics

, Volume 20, Issue 4, pp 772–792 | Cite as

Optimistic irrationality and overbidding in private value auctions

Original Paper


Bidding one’s value in a second-price, private-value auction is a weakly dominant solution (Vickrey in J Finance 16(1):8–37, 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.


Auctions Dominant strategy Out of equilibrium payoffs 

JEL Classification

C92 D44 D82 



We are grateful to participants at the ESA Ft. Lauderdale Meetings, the 2009 Econometric Society Meeting, CRETE 2015, and numerous seminar participants for their helpful suggestions, and especially to John Kagel for his insightful comments. We also thank the editor and two anonymous referees for their helpful comments. Part of this research was funded by an NSF Doctoral Dissertation Research Improvement Grant.

Supplementary material

10683_2017_9510_MOESM1_ESM.pdf (20 kb)
Electronic supplementary material 1 (PDF 20 kb)
10683_2017_9510_MOESM2_ESM.pdf (224 kb)
Electronic supplementary material 2 (PDF 225 kb)


  1. Andreoni, J., Che, Y.-K., & Kim, J. (2007). Asymmetric information about rivals’ types in standard auctions: An experiment. Games and Economic Behavior, 59(2), 240–259.CrossRefGoogle Scholar
  2. Breitmoser, Y. (2015). Knowing me, imagining you: Projection and overbidding in auctions. Working paper.Google Scholar
  3. Camerer, C. F., & Hua Ho, T. (1999). Experience-weighted attraction learning in normal-form games. Econometrica, 67, 827–874.CrossRefGoogle Scholar
  4. Cooper, D. J., & Fang, H. (2008). Understanding overbidding in second price auctions: An experimental study. Economic Journal, 118(532), 1572–1595.CrossRefGoogle Scholar
  5. Crawford, V. P., & Iriberri, N. (2007). Level-k auctions: Can a non-equilibrium model of strategic thinking explain the Winner’s curse and overbidding in private-value auctions? Econometrica, 75(6), 1721–1770.CrossRefGoogle Scholar
  6. Dechenaux, E., Kovenock, D., & Sheremeta, R. (2015). A survey of experimental research on contests, all-pay auctions and tournaments. Experimental Economics, 18(4), 609–669.CrossRefGoogle Scholar
  7. Dyer, D., Kagel, J., & Levin, D. (1989). Resolving uncertainty about numbers of bidders in independent private value auctions: An experimental analysis. RAND Journal of Economics, 2, 268–279.CrossRefGoogle Scholar
  8. Fishbacher, U. (2007). z-Tree: Zurich toolbox for ready-made economic experiments. Experimental Economics, Experimental Economics, 10(2), 171–178.CrossRefGoogle Scholar
  9. Fudenberg, D., & Levine, D. (1998). The theory of learning in games (1st ed.). Cambridge: MIT Press.Google Scholar
  10. Georganas, S. (2011). English auctions with resale: An experimental study. Games and Economic Behavior, 73(1), 147–166.CrossRefGoogle Scholar
  11. Georganas, S., & Nagel, R. (2011). English auctions with toeholds: An experimental study. International Journal of Industrial Organization, 29(1), 34–45.CrossRefGoogle Scholar
  12. Goeree, J. K., Holt, C. A., & Palfrey, T. R. (2002). Quantal response equilibrium and overbidding in private-value auctions. Journal of Economic Theory, 104(1), 247–272.CrossRefGoogle Scholar
  13. Harrison, G. (1989). Theory and misbehavior of first-price auctions. American Economic Review, 79(4), 749–762.Google Scholar
  14. Kagel, J. H. (1995). Auctions: A survey of experimental results. In J. H. Kagel & A. Roth (Eds.), The handbook of experimental economics. Princeton: Princeton University Press.Google Scholar
  15. Kagel, J. H., & Dan, L. (1993). Independent private value auctions: Bidder behaviour in first-, second- and third-price auctions with varying numbers of bidders. Economic Journal, 103(419), 868–879.CrossRefGoogle Scholar
  16. Kagel, J. H., Harstad, R. M., & Levin, D. (1987). Information impact and allocation rules in auctions with affiliated private values: A laboratory study. Econometrica, 55(6), 1275–1304.CrossRefGoogle Scholar
  17. Levin, D., Peck, J., & Ivanov, A. (2016). Separating Bayesian updating from non-probabilistic reasoning: An experimental investigation. American Economic Journal: Microeconomics, 8(2), 39–60.Google Scholar
  18. Li, S. (2016). Obviously strategy-proof mechanisms. SSRN working paper 2560028.Google Scholar
  19. McKelvey, R., & Palfrey, T. R. (1995). Quantal response equilibria in normal form games. Games and Economic Behavior, 10(1), 6–38.CrossRefGoogle Scholar
  20. Merlob, B., Plott, C., & Zhang, Y. (2012). The CMS auction: Experimental studies of a median-bid procurement auction with non-binding bids. The Quarterly Journal of Economics, 127(2), 793–828.CrossRefGoogle Scholar
  21. Noussair, C., Robin, S., & Ruffieux, B. (2004). Revealing consumers’ willingness-to-pay: A comparison of the BDM mechanism and the Vickrey auction. Journal of Economic Psychology, 25(6), 725–741.CrossRefGoogle Scholar
  22. Roth, A. E., & Erev, I. (1998). Predicting how people play games: Reinforcement learning in experimental games with unique mixed-strategy equilibria. American Economic Review, 88, 848–881.Google Scholar
  23. Selten, R., & Stoecker, R. (1986). End behavior in sequences of finite Prisoner’s Dilemma supergames: A learning theory approach. Journal of Economic Behavior and Organization, 7, 47–70.CrossRefGoogle Scholar
  24. Vickrey, W. (1961). Counterspeculation and competitive sealed tenders. Journal of Finance, 16(1), 8–37.CrossRefGoogle Scholar

Copyright information

© Economic Science Association 2017

Authors and Affiliations

  1. 1.City University LondonLondonUK
  2. 2.Ohio State UniversityColumbusUSA
  3. 3.University of ArkansasFayettevilleUSA

Personalised recommendations