Browsing by Subject "Subjective probability weighting"

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    First price auctions under prospect theory with linear probability weighting
    (2011) Keskin, Kerim
    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.
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    Inverse S-shaped probability weighting functions in first-price sealed-bid auctions
    (Springer Verlag, 2016) Keskin, K.
    It is often observed in first-price sealed-bid auction experiments that subjects tend to bid above the risk neutral Nash equilibrium predictions. One possible explanation for this overbidding phenomenon is that bidders subjectively weight their winning probabilities. In the relevant literature, the probability weighting functions (PWFs) suggested to explain overbidding imply the underweighting of all probabilities. However, such functions are not in accordance with the PWFs commonly used in the literature (i.e., inverse S-shaped functions). In this paper we introduce inverse S-shaped PWFs into first-price sealed-bid auctions and investigate the extent to which such weighting functions explain overbidding. Our results indicate that bidders with low valuations underbid, whereas those with high valuations overbid. We accordingly conclude that inverse S-shaped PWFs provide a partial explanation for overbidding. © 2015, Springer-Verlag Berlin Heidelberg.