Abstract
We report an experiment on a decision task by Samuelson and Bazerman (1985). Subjects submit a bid for an item with an unknown value. A winner’s curse phenomenon arises when subjects bid too high and make losses. Learning direction theory can account for this. However, other influences on behaviour can also be identified. We introduce impulse balance theory to make quantitative predictions on the basis of learning direction theory. We also look at monotonic ladder processes. It is shown that for this kind of Markov chains the impulse balance point is connected to the mode of the stationary distribution.
This is a preview of subscription content, log in via an institution to check access.
References
Abbink, K. and Sadrieh, A. (1995). “RatImage–-Research Assistance Toolbox for Computer-Aided Human Behavior Experiments.” SFB Discussion Paper B-325, University of Bonn.
Akerlof, G.A. (1970). “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism.” Quarterly Journal of Economics. 84(3), 488–500.
Ball, S.B., Bazerman, H., and Carroll, J.S. (1991). “An Evaluation of Learning in the Bilateral Winner’s Curse.” Organizational Behavior and Human Decision Processes. 48, 1–22.
Benartzi, S. and Thaler, R.H. (1995). “Myopic Loss Aversion and the Equity Premium Puzzle.” Quarterly Journal of Economics. 110(1), 73–92.
Berninghaus, S. and Ehrhart, K.-M. (1998). “Time Horizon and Equilibrium Selection in Tacit Coordination Games: Experimental Results.” Journal of Economic Behavior & Organization. 37(2), 231–248.
Bush, R.R. and Mosteller, R. (1955). Stochastic Models of Learning. New York: Wiley.
Camerer, C. and Ho, T.H. (1999). “Experience-Weighted Attraction Learning in Normal Form Games.” Econometrica. 67(4), 827–874.
Capen, E.C., Clapp, R.V., and Campbell, W.M. (1971). “Competitive Bidding in High-Risk Situations.” Journal of Petroleum Technology. 23, 641–653.
Cason, T. and Friedman, D. (1997). “Price Formation in Single Call Markets.” Econometrica. 65(2), 311–345.
Grosskopf, B., Erev, I., and Yechiam, E. (2000). “Foregone with the Wind.” Mimeo, Universitat Pompeu Fabra.
Kagel, J.H. (1995). “Auctions.” In J.H. Kagel and A.E. Roth (eds.), The Handbook of Experimental Economics. Princeton University Press.
Kagel, J.H. and Levin, D. (1999). “Common Value Auctions with Insider Information.” Econometrica. 67(5), 1219–1238.
Kahneman, D. and Tversky, A. (1979). “Prospect Theory: An Analysis of Decision under Risk.” Econometrica. 47(2). 263–291.
Kuon, B. (1993). “Two-Person Bargaining with Incomplete Information.” Lecture Notes in Economics and Mathematical Systems, vol. 412. Springer-Verlag Berlin.
Mitzkewitz, M. and Nagel, R. (1993). “Envy, Greed, and Anticipation in Ultimatum Games with Incomplete Information.” International Journal of Game Theory., 22, 171–198.
Nagel, R. (1995). “Unraveling in Guessing Games: An Experimental Study.” American Economic Review. 85(5), 1313–1326.
Roth, A. and Erev, I. (1995). “Learning in Extensive-Form Games: Experimental Data and Simple Dynamic Models in the Intermediate Term.” Games and Economic Behavior. 8, 164–212.
Ryll, W. (1996). “Litigation and Settlement in a Game with Incomplete Information.” Lecture Notes in Economics and Mathematical Systems vol. 440. Springer-Verlag Berlin.
Sadrieh, A. (1998). “The Alternating Double Auction Market: A Game Theoretic and Experimental Investigation.” Lecture Notes in Economics and Mathematical Systems, vol. 466. Springer-Verlag, Berlin.
Samuelson, W.F. and Bazerman, M.H. (1985). “The Winner’s Curse in Bilateral Negotiations.” In V.L. Smith (ed.), Research in Experimental Economics. Greenwich: JAI Press.
Scholz, R.W. (1987). Cognitive Strategies in Stochastic Thinking. Dordrecht: Reidel.
Selten, R. and Buchta, J. (1999). “Experimental Sealed-Bid First Price Auctions with Directly Observed Bid Functions.” In D. Budescu, I. Erev, and R. Zwick (eds.), Games and Human Behavior: Essays in the Honor of Amnon Rapoport. NJ: Lawrenz Associates Mahwah.
Selten, R. and Stoecker, R. (1986). “End Behavior in Sequences of Finite Prisoners’ Dilemma Supergames: A Learning Theory Approach.” Journal of Economic Behavior and Organization. 7, 47–70.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Selten, R., Abbink, K. & Cox, R. Learning Direction Theory and the Winner’s Curse. Exp Econ 8, 5–20 (2005). https://doi.org/10.1007/s10683-005-1407-5
Received:
Revised:
Accepted:
Issue Date:
DOI: https://doi.org/10.1007/s10683-005-1407-5