A direct test of risk aversion and regret in first price sealed-bid auctions

A direct test of risk aversion and regret in first price sealed-bid auctions

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Article ID: iaor200968858
Country: United States
Volume: 6
Issue: 2
Start Page Number: 75
End Page Number: 86
Publication Date: Jun 2009
Journal: Decision Analysis
Authors: ,
Keywords: risk
Abstract:

Why do bidders tend to bid higher than the risk-neutral Nash equilibrium in sealed-bid first price auction experiments? The effect of risk aversion has long been offered as a possible explanation. More recently, several studies proposed regret as another explanation, citing strong experimental evidence. But which effect is more important? We design an experiment to separate the effects of risk aversion from those of regret. We find overwhelming evidence in support of the regret model, and virtually no support for the constant relative risk aversion model.

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