Subjective Probabilities in Games: An Application to the Overbidding Puzzle

24 Pages Posted: 28 Oct 2009

See all articles by Olivier Armantier

Olivier Armantier

Federal Reserve Bank of New York

Nicolas Treich

French National Institute for Agricultural Research (INRA); CESifo (Center for Economic Studies and Ifo Institute)

Abstract

This article illustrates how the joint elicitation of subjective probabilities and preferences may help us understand behavior in games. We conduct an experiment to test whether biased probabilistic beliefs may explain overbidding in first-price auctions. The experimental outcomes indicate that subjects underestimate their probability of winning the auction, and indeed overbid. When provided with feedback on the precision of their predictions, subjects learn to make better predictions, and to curb significantly overbidding. The structural estimation of different behavioral models suggests that biased probabilistic beliefs are a driving force behind overbidding, and that risk aversion plays a lesser role than previously believed.

Suggested Citation

Armantier, Olivier and Treich, Nicolas, Subjective Probabilities in Games: An Application to the Overbidding Puzzle. International Economic Review, Vol. 50, No. 4, pp. 1079-1102, November 2009. Available at SSRN: https://ssrn.com/abstract=1495268 or http://dx.doi.org/10.1111/j.1468-2354.2009.00560.x

Olivier Armantier (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Nicolas Treich

French National Institute for Agricultural Research (INRA) ( email )

147, rue de l'Universite
Paris Cedex 07, 78-Yvelines 75338
France
+33 0 1 42 75 90 00 (Phone)
+33 0 1 47 05 99 66 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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