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An Iterated Prospect Theory Model for the Dutch Auction

Authors
Murray Bennett
University of Newcastle, Australia
Rachel Mullard
University of Newcastle, Australia
Dr. Scott Brown
University of Newcastle ~ School of Psychology
Dr. Ami Eidels
University of Newcastle, Australia ~ Psychology
Abstract

Dutch auctions are used in many industries. Goods are initially offered at a high price, which is gradually lowered until the first bidder accepts it. Bidders trade certainty and price: early bids secure the sale, but overpay; later bids are cheaper, but risk losing out to another bidder. We used group-based laboratory experiments to investigate decision-making in Dutch auctions. We developed a model for bidding in Dutch auctions, based on a dynamic extension of Prospect Theory. At each moment of the auction, the buyer is faced with a decision that can be framed as classical Prospect Theory: a certain option (buy now!) or a risky option (wait a little longer for the price to fall, and hope that no-one else buys before then). We show that this model reproduces the basic phenomena of the task, and also provides a useful framework for investigating interesting questions about auction psychology. We also discuss extensions to data from real Dutch auctions.

Tags

Keywords

Decision making
auction
economic

Topics

Cognitive Modeling
Decision Making
Discussion
New
Automated dutch auction capturing Last updated 2 months ago

Hi, This project is really fascinating. I love the approach and the extensive modeling evaluation and comparison one can do with a large set of data. One thing I was wondering was whether it would be possible to automatically extract the sort of data your undergrad is encoding now. It wouldn't be trivial and clearly ensuring the developed met...

Prof. Joseph Larry Austerweil 2 comments