When the Economics of a Decision Matters More than the Psychology of the Decision: Understanding the Economic Significance of Auction Fever

Matthew McCarter () and Abel Winn

Working Papers from Chapman University, Economic Science Institute

Abstract: This article uses archival data from English auctions of animal art and eBay gift cards coupled with two laboratory experiments to study the effect of financial stakes on an interdependent decision-making phenomenon critical to organizational success: auction fever. Congruent with rational irrationality theory, we find evidence that the frequency and severity of auction fever decreases as the stakes increase, calling into question the economic significance of the phenomenon. In Study 1, we used two archival field datasets to show that the frequency and magnitude of overbidding decrease as the bidder’s willingness to pay increases. In Study 2 a laboratory experiment replicated this finding as winners make up a minority (only 15.2%) of overbidders, making losers (who incur no cost for overbidding) four-and-half times more likely to experience “auction fever”. In Study 3, we compare the frequency of auction fever between an English auction institution (where only the winner pays) and penny auction institution (where every bidder pays) – and find that the frequency of auction fever declines from 33% in English auctions to 12.7% in penny auctions. In contrast to the English auctions, bidders in the penny auction were more likely to spend beyond their initial limits when their (perceived) item values were higher; this occurs because the cost of each additional bid is smaller relative to the perceived value of the item. These results demonstrate that financial stakes of a decision may override seemingly robust psychological processes and they encourage researchers to test their ideas in contexts where the economic significance of a decision is considerable.

Keywords: Auction Fever; Bidder’s Curse; Economic Significance; English Auction; Overbidding; Penny Auction; Statistical Significance (search for similar items in EconPapers)
Pages: 50 pages
Date: 2013
New Economics Papers: this item is included in nep-cbe, nep-cdm and nep-exp
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Persistent link: https://EconPapers.repec.org/RePEc:chu:wpaper:13-19

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