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Separating probability weighting and risk aversion in first-price auctions

Lookup NU author(s): Dr Matt WalkerORCiD

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Abstract

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.

Publication metadata

Author(s): Haruvy E, Heinrich T, Walker MJ

Publication type: Article

Publication status: Published

Journal: Economics Letters

Year: 2022

Volume: 221

Print publication date: 01/12/2022

Online publication date: 18/10/2022

Acceptance date: 12/10/2022

Date deposited: 18/10/2022

ISSN (electronic): 0165-1765

Publisher: Elsevier

URL: https://doi.org/10.1016/j.econlet.2022.110891

DOI: 10.1016/j.econlet.2022.110891

ePrints DOI: 10.57711/c4qj-3d37

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