Knowing me, imagining you: Projection and overbidding in auctions

Yves Breitmoser ()

MPRA Paper from University Library of Munich, Germany

Abstract: People overestimate the probability that others share their values or preferences. I introduce type projection equilibrium (TPE) to capture such projection in Bayesian games. TPE allows each player to believe his opponents share his type with intermediate probability \rho. After establishing existence, I address my main question: How does projection affect behavior in games? I analyze auctions and distribution games. In auctions, projection implies an increased sense of competition, which induces overbidding in all (first-price) auctions. In addition, it biases the perceived value distribution, which induces cursed bidding in common value auctions. Thus, projection induces a hitherto neglected bias in bidding. It is novel in that it explains behavior across conditions and it is independently founded in psychology. I test projection equilibrium in multiple ways on existing data and find that it substantially improves on alternative concepts, both in isolation and in addition to them. The findings are cross-validated by testing projection of social preferences in distribution games.

Keywords: auctions; overbidding; winner's curse; projection; risk aversion; cursed equilibrium; level-k; social preferences (search for similar items in EconPapers)
JEL-codes: C72 C91 D44 (search for similar items in EconPapers)
Date: 2015-02-10
New Economics Papers: this item is included in nep-exp, nep-gth, nep-mic and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Knowing me, imagining you: Projection and overbidding in auctions (2019)
Working Paper: Knowing me, imagining you: Projection and overbidding in auctions (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:62052

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