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Knowing me, imagining you: Projection and overbidding in auctions

Author

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  • Breitmoser, Yves
Abstract
People overestimate the probability that others share their values or preferences. I introduce type projection equilibrium (TPE) to capture such projection in Bayesian games. TPE allows each player to believe his opponents share his type with intermediate probability \rho. After establishing existence, I address my main question: How does projection affect behavior in games? I analyze auctions and distribution games. In auctions, projection implies an increased sense of competition, which induces overbidding in all (first-price) auctions. In addition, it biases the perceived value distribution, which induces cursed bidding in common value auctions. Thus, projection induces a hitherto neglected bias in bidding. It is novel in that it explains behavior across conditions and it is independently founded in psychology. I test projection equilibrium in multiple ways on existing data and find that it substantially improves on alternative concepts, both in isolation and in addition to them. The findings are cross-validated by testing projection of social preferences in distribution games.

Suggested Citation

  • Breitmoser, Yves, 2015. "Knowing me, imagining you: Projection and overbidding in auctions," MPRA Paper 62052, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:62052
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    3. Tristan Gagnon-Bartsch & Marco Pagnozzi & Antonio Rosato, 2021. "Projection of Private Values in Auctions," American Economic Review, American Economic Association, vol. 111(10), pages 3256-3298, October.
    4. Breitmoser, Yves, 2019. "Knowing me, imagining you: Projection and overbidding in auctions," Games and Economic Behavior, Elsevier, vol. 113(C), pages 423-447.
    5. Mira Frick & Ryota Iijima & Yuhta Ishii, 2018. "Dispersed Behavior and Perceptions in Assortative Societies," Cowles Foundation Discussion Papers 2128R3, Cowles Foundation for Research in Economics, Yale University, revised Jun 2022.
    6. Yves Breitmoser & Lian Xue & Jiwei Zheng & Daniel John Zizzo, 2023. "Organizational Design and Error Propagation: Theory and Experiment," Discussion Papers Series 666, School of Economics, University of Queensland, Australia.
    7. Lata Gangadharan & Philip J. Grossman & Nina Xue, 2022. "Stepping Stone: Identifying self-image concerns from motivated beliefs: Does it matter how and whom you ask?," Monash Economics Working Papers 2022-05, Monash University, Department of Economics.
    8. Bauer, Dominik & Wolff, Irenaeus, 2019. "Biases in Beliefs," VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203601, Verein für Socialpolitik / German Economic Association.
    9. Lata Gangadharan & Philip J. Grossman & Nina Xue, 2021. "Identifying self-image concerns from motivated beliefs: Does it matter how and whom you ask?," Monash Economics Working Papers 2021-17, Monash University, Department of Economics.
    10. Cartwright, Edward & Wooders, Myrna, 2020. "Own experience bias in evaluating the efforts of others," Journal of Economic Behavior & Organization, Elsevier, vol. 173(C), pages 164-178.
    11. Olena Myrna, 2022. "Lower price increases, the bounded rationality of bidders, and underbidding concerns in online agricultural land auctions: The Ukrainian case," Journal of Agricultural Economics, Wiley Blackwell, vol. 73(3), pages 826-844, September.
    12. Dominik Bauer & Irenaeus Wolff, 2018. "Biases in Beliefs: Experimental Evidence," TWI Research Paper Series 109, Thurgauer Wirtschaftsinstitut, Universität Konstanz.
    13. Sebastian Fehrler & Baiba Renerte & Irenaeus Wolff, 2020. "Beliefs about Others: A Striking Example of Information Neglect," TWI Research Paper Series 118, Thurgauer Wirtschaftsinstitut, Universität Konstanz.
    14. Sotiris Georganas & Dan Levin & Peter McGee, 2017. "Optimistic irrationality and overbidding in private value auctions," Experimental Economics, Springer;Economic Science Association, vol. 20(4), pages 772-792, December.

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    Keywords

    auctions; overbidding; winner's curse; projection; risk aversion; cursed equilibrium; level-k; social preferences;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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