Auction Overbidding: The Drive Behind it

Feb 15, 2010   

At a recent ceramics auctions in NYC, I bid successfully at both Christies and Sotheby’s. It was nice to get pieces that I both wanted and added to my collection. It was less pleasant to pay what I considered high prices. Nevertheless, most of the time, if I purchased these same articles at a dealer, they would cost anywhere from two to five times more than what I paid at the public sale. So, I was happy. The question is, was pleasure my overwhelming feeling the moment I purchased the items?

Elizabeth A. Phelps and her colleagues would argue that it wasn’t. The scientist from the New York University in NYC and associates would instead suggest that I bid not to win, but because I was afraid of losing. Contradictory as it seems, this is what their research data shows.

Scientific experimental auction work done as far back as 1982 suggests that bidders tend to overbid. One explanation is that bidders bid to win. They submit higher and higher offers because they have a rival for the prize. In Phelps’ and colleagues experiment, however, that didn’t happen.

The testing went like this. The seventeen volunteers participated in both an auction and a lottery. The auction was against another person and the lottery was played opposing a computer. Functional Magnetic resonance imaging (fMRI) was used to examine patterns of activation in the brain during the different trials. The goal of the fMRI study was, “to examine the effects of type of social competition (auction versus lottery) and type of incentive (money versus points) on blood oxygen dependent responses to winning or losing.” The BOLD (blood oxygen level dependent) response is related to increased blood flow secondary to neuronal activation.

Read more at: http://www.hcplive.com/physicians-money-digest/columns/my-money-md/02-2010/fear_of_losing_auction_overbidding#sthash.9UfRygaK.dpuf