DO AUCTION BIDS BETRAY EXPECTATIONS-BASED REFERENCE DEPENDENT PREFERENCES? A TEST, EXPERIMENTAL EVIDENCE, AND ESTIMATES OF LOSS AVERSION

A. Banerji and Neha Gupta
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A. Banerji: Department of Economics, Delhi School of Economics, Delhi, India

No 206, Working papers from Centre for Development Economics, Delhi School of Economics

Abstract: In this paper, we provide a novel experimental auction design that exploits an exogenous variation in the probability of winning to test for the presence of expectations-based reference dependent preferences. We prove that (i) in this design, (which is a one parameter modification of a Becker-de Groote-Marschak (BDM) auction), a lower probability of winning will cause a loss averse agent to bid lower, for a large range of intrinsic values for the object. Data from an experiment demonstrate the existence of this effect. The effect would be absent if preferences were 'standard', or if the status quo was the reference point. Thus we contribute to the nascent literature that empirically documents the importance of expectations as a source of reference points. (ii) We further prove that the experimental design enables unique identification of participants' value distribution and loss averse than men. Finally, as a contribution to experimental methodology, we prove that the BDM mechanism will underestimate loss averse participants' values, we quantify the underestimation, and we suggest methods to bound this bias.

Keywords: Auctions; Expectations; Loss Aversion; Reference dependence (search for similar items in EconPapers)
JEL-codes: C91 D03 D44 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2011-11
New Economics Papers: this item is included in nep-exp and nep-upt
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