Naive Bidding

UIUC Working Paper No. 00-0118

32 Pages Posted: 7 Apr 2001

See all articles by George Deltas

George Deltas

University of Illinois at Urbana-Champaign - Department of Economics

Richard Engelbrecht-Wiggans

University of Illinois at Urbana-Champaign - Department of Business Administration

Date Written: September 2000

Abstract

This paper presents an equilibrium explanation for the persistence of naive bidding. Specifically, we consider a common value auction in which a "naive" bidder (who ignores the Winner's Curse) competes against a fully rational bidder (who understands that her rival is not). We show that the naive bidder earns higher equilibrium profits than the rational bidder when the signal distribution is symmetric and unimodal. We then consider a sequence of such auctions with randomly selected participants from a population of naive and rational bidders, with the proportion of bidder types in the population evolving in response to their relative payoffs in the auctions. We show that the evolutionary equilibrium contains a strictly positive proportion of naive bidders. Finally, we consider more general examples. In these examples (i) a naive bidder matched against a rational bidder does worse than his rational opponent but (ii) a naive bidder matched against a rational bidder does better than a rational bidder matched against another rational bidder. Again, the evolutionary equilibrium contains a strictly positive proportion of naive bidders.

Keywords: Bounded Rationality, Bidding, Winner's Curse, Common Value Auctions

JEL Classification: D44

Suggested Citation

Deltas, George and Engelbrecht-Wiggans, Richard, Naive Bidding (September 2000). UIUC Working Paper No. 00-0118, Available at SSRN: https://ssrn.com/abstract=260853 or http://dx.doi.org/10.2139/ssrn.260853

George Deltas (Contact Author)

University of Illinois at Urbana-Champaign - Department of Economics ( email )

1206 South Sixth Street
450 Commerce West
Champaign, IL 61820
United States
217-333-4586 (Phone)
217-244-6678 (Fax)

Richard Engelbrecht-Wiggans

University of Illinois at Urbana-Champaign - Department of Business Administration ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
217-333-1028 (Phone)

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