Separating probability weighting and risk aversion in first-price auctions. (English) Zbl 1506.91064
Summary: In first price sealed-bid auctions, a power probability weighting function is observationally equivalent to a model with constant relative risk aversion. By comparing auctions with different ceilings on a computerized opponent’s bid space, we can separate inverse S-shaped probability weighting as commonly used in the literature and risk-averse preferences from the distribution of observed bids. We find evidence to support both theories in the data. However, we also observe a significant number of violations after accounting for decision noise, which suggest that bidders’ valuations may be malleable to cues of the auction environment.
MSC:
| 91B26 | Auctions, bargaining, bidding and selling, and other market models |
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