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Rewards, Experience and Decision Costs in First Price Auctions

Vernon Smith and James Walker

Economic Inquiry, 1993, vol. 31, issue 2, 237-45

Abstract: Consistent with a model of asymmetric risk aversion, subjects in first price auctions consistently bid above the risk neu tral Nash prediction. It has been argued that this is due to low opportun ity cost of deviating from the risk neutral bid. The authors increase opportunity cost (and payoff levels) by factors of 0, 1, 5, 10, and 20 from the normal levels generating payoffs up to $250 for risk neutra l subjects and observe an insignificant increase in the slope of individual bid functions. The RMSE of bids declines significantly. T his is consistent with a reward/decision cost model of bidding behavior. Copyright 1993 by Oxford University Press.

Date: 1993
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Handle: RePEc:oup:ecinqu:v:31:y:1993:i:2:p:237-45