First price auctions under prospect theory with linear probability weighting
Author(s)
Advisor
Kara, TarıkDate
2011Publisher
Bilkent University
Language
English
Type
ThesisItem Usage Stats
190
views
views
57
downloads
downloads
Abstract
Overbidding in first-price sealed-bid auctions is a well-known result in the
auction theory literature. For the possible reasons behind this phenomenon,
economists provided many explanations; such as risk aversion, regret theory,
and subjective probability weighting. However, for subjective probability
weighting to explain overbidding, the probability weighting function (PWF)
is needed to be underweighting all probabilities. Such a function is not in
accord with PWFs in the prospect theory literature as it suggests a specific
function which satisfies certain properties. In this paper we investigate, to
what extent prospect theory is able to explain overbidding by using a linear
PWF satisfying all of the axiomatic properties (Currim and Sarin, 1989).
Moreover, we introduce a non-zero reference point, fully utilizing prospect
theory. Our results show that, subjective probability weighting alone is unable
to explain overbidding. However, with the non-zero reference point assumption,
we obtain partial overbidding.
Keywords
First-price auctionsSubjective probability weighting
Prospect theory
Reference point
Overbidding