Risk Aversion and the Winner's Curse

Charles Holt and Roger Sherman

Southern Economic Journal, 2014, vol. 81, issue 1, 7-22

Abstract: This article analyzes an auction in which bidders see independent components of a common prize value. The Nash equilibrium for two rational bidders is shown to be independent of risk attitudes. The information structure allows explicit calculation of an alternative equilibrium in which naive bidders do not correctly discount the value of the prize, contingent on winning, and thus they suffer the winner's curse. Subjects in a laboratory experiment clearly fall prey to the winner's curse; the data conform most closely to the predictions of the naive model. Moreover, the level of risk aversion implied by fitting the naive model is similar to an independent risk aversion measure obtained in a separate (private value) bidding exercise.

Date: 2014
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https://doi.org/10.4284/0038-4038-2011.013

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Persistent link: https://EconPapers.repec.org/RePEc:wly:soecon:v:81:y:2014:i:1:p:7-22

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