Auction Psychology
This article talks about how bidders, as emotional human beings, behave differently from what the normal auction theory predicts. Theoretically, as we have learned in class, for both first price auction and second price auction, the dominant strategy will always be bidding for the vale that the bidder thinks the object is worth. In real life, however, it’s actually more common for bidders to bid for a price that’s higher than the theoretical prediction.
Unlike other real life auctions, eBay even allow buyers to set a private “maximum bid” in advance. But still, about half of eBay auctions result in higher sale prices than the “buy it now” price. The paper argues that it is because of “one incredibly irrational part of the bidding process: the bidders themselves.” One of the most important characteristics of auctions is that it’s time pressured, and normally, people only bid for things they value highly, the tightness of time creates excitement and in the end trigger irrational biddings. Auctions usually involve more than one bidders, so it is common for a bidder to have several competitors. Competitors are not like a computer programs, most people play rational against computer programs, but when it comes to competing with other people, most people find hard to avoid thinking about beating other people. This idea shifts bidders away from the theoretical game theory design, and most people end up paying for preventing others to have the object instead of achieving their own wellbeing. Another psychological bias that operates in auctions is the endowment effect. By encouraging us to connect the bid with the sale item, bidding on items lets us fantasies about owning them – stimulating a kind of endowment effect. Endowment effect pushes people to increase their value on objects and therefore irrationally place a higher bid.
I found this article particularly interesting because it supplements the ideas we talked about in class. I believe, when doing the I-clicker questions, there are some people whose first incentive is to place a higher bid when other people are behaving irrationally and bidding two more bucks than their values. And I have heard many stories about how people got broke just because of a series irrational auctions. By reading this article, we can actually reason why, despite the well-proven dominant strategies, objects are still sold for a much higher price at auctions.
Link to the article: