Fear of losing drives people to overbid at auctions

September 26th, 2008 - 1:21 pm ICT by ANI  

Washington, Sept 26 (ANI): The fear of losing might drive bidders to pay too much at the auctions, according to a new study.

The team of neuroscientists and economists at New York University suggests that the fear of losing the social competition inherent in an auction forces people to bid “too high,” or overbid.

With the help of brain imaging technique the researchers studied the brain activation patterns as participants played either an auction game with a partner or a lottery game.

In both games participants could win money, but in the auction game winning depended on outbidding a partner.

The analysis showed primary difference when winning or losing in the auction vs. lottery games was an exaggerated response to losses in the auction game.

The magnitude of this exaggerated loss response in the striatum, part of the brain’’s reward circuitry, during the auction game correlated with the tendency to overbid, suggesting that perhaps the prospect of losing to an opponent bidder in an auction may lead people to bid “too high.”

For further analysis, economists conducted behavioural economic study where three groups of participants played an auction game against a partner under different circumstances.

The control group was simply given values and asked to make bids. The Bonus-Frame group was told that if they won the auction, they would also receive a bonus of 15 experimental dollars.

The Loss-Frame group was given 15 experimental dollars prior to the auction, but participants were told they would lose the 15 dollars if they failed to win the auction.

In both the Loss and Bonus-Frame conditions, only the winners would get an additional 15 experimental dollars, so the auctions were strategically identical.

The team found that contemplation of loss may, in part, drive overbidding, participants in the Loss-Frame condition consistently bid higher than the other two groups, resulting in a greater potential profit for a hypothetical auctioneer.

These results highlight a role for the contemplation of social loss in understanding the tendency to bid ”too high” in auctions and emphasize the importance of considering social factors in economic decisions,” said Professor Elizabeth Phelps and Mauricio Delgado, now an assistant professor at Rutgers University in Newark, N.J.

“By combining neuroeconomic and behavioural economic techniques we were able to provide novel insight into a classic economic problem.”

The study appears in the latest issue of the journal Science. (ANI)

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