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Competition strength influences individual preferences in an auction game.

Toelch, U; Jubera-Garcia, E; Kurth-Nelson, Z; Dolan, RJ; (2014) Competition strength influences individual preferences in an auction game. Cognition , 133 (2) 480 - 487. 10.1016/j.cognition.2014.07.010. Green open access

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Abstract

Competitive interactions between individuals are ubiquitous in human societies. Auctions represent an institutionalized context for these interactions, a context where individuals frequently make non-optimal decisions. In particular, competition in auctions can lead to overbidding, resulting in the so-called winner's curse, often explained by invoking emotional arousal. In this study, we investigated an alternative possibility, namely that competitors' bids are construed as a source of information about the good's common value thereby influencing an individuals' private value estimate. We tested this hypothesis by asking participants to bid in a repeated all-pay auction game for five different real items. Crucially, participants had to rank the auction items for their preference before and after the experiment. We observed a clear relation between auction dynamics and preference change. We found that low competition reduced preference while high competition increased preference. Our findings support a view that competitors' bids in auction games are perceived as valid social signal for the common value of an item. We suggest that this influence of social information constitutes a major cause for the frequently observed deviations from optimality in auctions.

Type: Article
Title: Competition strength influences individual preferences in an auction game.
Location: Netherlands
Open access status: An open access version is available from UCL Discovery
DOI: 10.1016/j.cognition.2014.07.010
Publisher version: http://dx.doi.org/10.1016/j.cognition.2014.07.010
Language: English
Additional information: © 2014 The Authors. Published by Elsevier Inc. This is an open access article under the CC BY license (http://creativecommons.org/licenses/by/3.0/).
Keywords: All pay auction, Competition, Decision-making, Preference formation, Social information
UCL classification: UCL > Provost and Vice Provost Offices
UCL > Provost and Vice Provost Offices > School of Life and Medical Sciences
UCL > Provost and Vice Provost Offices > School of Life and Medical Sciences > Faculty of Brain Sciences
UCL > Provost and Vice Provost Offices > School of Life and Medical Sciences > Faculty of Brain Sciences > UCL Queen Square Institute of Neurology
UCL > Provost and Vice Provost Offices > School of Life and Medical Sciences > Faculty of Brain Sciences > UCL Queen Square Institute of Neurology > Imaging Neuroscience
URI: https://discovery.ucl.ac.uk/id/eprint/1447931
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