Is Overbidding in Online Auctions the Result of a Pseudo-Endowment Effect?

Abstract

Actual possession of an item has been shown to increase an owner's valuation of it, a phenomenon termed the endowment effect (Thaler, 1980). We hypothesize that temporarily being the high bidder during an auction induces a pseudo-endowment effect. This effect may foster attachment to an item during the auction and thus promote overbidding. We examine this effect in two studies. In the first study, we examined bids from 1088 eBay Motors' passenger vehicle auctions to test for evidence of the pseudo-endowment effect and for evidence that this effect is reduced by market experience. Pseudo-endowment is measured using two proxies: the amount of time a person has participated in an individual eBay Motors' passenger vehicle auction and the aggregated duration that a bidder is listed as the high bidder for that auction. Both proxies are found to be positively and significantly associated with the probability that the bidder will rebid in a single second-price auction. We further find that the pseudo-endowment effect is more pronounced than the effects of auction fever. We also find that these non-normative effects are reduced by market experience. The second study is a variation of the classic mug experiment in which we control for opponent effects. Consistent with findings of the field study, we found that the duration of examining an item positively influenced participants' bids for the item.

Keywords: Auctions, behavioral economics, endowment effect, consumer behavior

JEL Classification: D1, D12, D80