Separating probability weighting and risk aversion in first-price auctions

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.

Subjects

Bidding

First-price auctions

Experiment

Inverse S-shaped probability weighting

Bias

DDC Class

300: Sozialwissenschaften, Soziologie

330: Wirtschaft

Publication version

acceptedVersion

Lizenz

https://creativecommons.org/licenses/by-nc-nd/4.0/

Name

separating_probability_weighting.pdf

Size

993.11 KB

Format

Adobe PDF

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Separating probability weighting and risk aversion in first-price auctions