Auction Psychology: Emotions behind Bidding
When we hear the word “auction,” in many times we think of the ascending-bid auctions. In these auctions, the seller raises the price step-by-step until the final price is reached for only one bidder to remain and win while others drop out. In this case, staying after the seller’s price reaches the bidder’s true value would charge him/her more than expected even if he/she wins, and dropping out early would give the bidder nothing. So this indicates that the dominant strategy for ascending-bid auctions is to bid the true value.
However, it is not always the case; rather, bidding more for the sake of winning happens a lot. A common example of the overbidding would be the case that in eBay, many are often caught paying much higher price than the originally assigned value of the item. If their final payment had to be higher than the “buy it now” price, why would they participate in the auctions so enthusiastically?
In fact, the auction systems allow the bidders to make rational decisions. On the other hand, emotional drives lead to bidding behaviors that are not based on optimized calculations, like in the case of eBay overbidding. According to researches in behavioral economics, psychological bias called “endowment effect” gives rise to the common overbidding behavior in the ascending auction. It stimulates the bidders to desire for the sale item badly, even with higher bids, by encouraging them to fantasize about possessing the item by bidding. This allows participants to compete against one another to own the spotlighted item, while making irrationally driven decisions for overbidding.
The concept of scarcity also takes part in making the auction look so special. The items can be scarce and unique; there can be scarcity in time, as well. Aware that missing the bids does not guarantee a chance, bidders feel pushed to keep participating and acquire the item in fear of losing it despite all the efforts. Participation of celebrities makes the item and the event remarkable, too. In the famous Goldschmidt Sale of 1958, Kirk Douglas, Anthony Quinn, Somerset Maugham and Lady Churchill attended for seven Impressionist and Modern paintings. The auction and the items on sale were highly spotlighted, and the artworks were all sold with the highest winning bid of the day in only 21 minutes. Thus, the emotional drives are strong enough to outweigh the rational calculations for bidding, and there exists the psychology behind the auction.
Sources:
https://www.quora.com/Behavioral-Economics/What-is-the-psychology-behind-auction-bidding
http://mindhacks.com/2012/09/19/bbc-column-auction-psychology/
https://books.google.com/books?id=TNdkota-2ssC&pg=PT107&lpg=PT107&dq=Goldschmidt+sale+1958+churchill&source=bl&ots=hVifsmWwBA&sig=A4AJcAE85eaq03lG1ZIvUKhCjxI&hl=en&sa=X&ved=0CB0Q6AEwAGoVChMI29m8v_TFyAIVy3Q-Ch3U_wVy#v=onepage&q=Goldschmidt%20sale%201958%20churchill&f=false