Ambiguity Aversion in First-Price Sealed-Bid Auctions

Ahti A Salo and Martin Weber

Journal of Risk and Uncertainty, 1995, vol. 11, issue 2, 123-37

Abstract: Experiments on first-price sealed-bid auctions with independent private values have shown that submitted bids typically exceed Nash-equilibrium predictions for risk-neutral bidders. Existing bidding models explains this phenomenon by assuming that the bidders are risk-averse and capable of drawing complete and correct inferences about their winning probabilities. In this article, we use the Choquet expected utility (CEU) theory to demonstrate that the observed bidding behavior can also be attributed to ambiguity aversion which causes the bidders to underestimate their chances of winning the auction. Empirical support for CEU bidding models is given through an analysis of recent bidding data. Copyright 1995 by Kluwer Academic Publishers

Date: 1995
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