Separating probability weighting and risk aversion in first-price auctions

Ernan Haruvy, Timo Heinrich and Matthew Walker

Economics Letters, 2022, vol. 221, issue C

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.

Keywords: Bias; Experiment; First-price auctions; Probability weighting; Risk aversion (search for similar items in EconPapers)
JEL-codes: C57 C91 D81 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:221:y:2022:i:c:s0165176522003652

DOI: 10.1016/j.econlet.2022.110891

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