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Fishing for fools
Title / Series / Name
Publication Volume
Publication Issue
Pages
Authors
Editors
Keywords
Amplification
Auctions
Behavioral biases
Fixed-price markets
Overbidding
Finance
Economics and Econometrics
Auctions
Behavioral biases
Fixed-price markets
Overbidding
Finance
Economics and Econometrics
URI
https://hdl.handle.net/20.500.14018/27572
Abstract
We show that common market settings tend to amplify rather than reduce the effect of behavioral biases on prices and other market outcomes. We study two common market mechanisms, auctions and fixed-price markets, and establish three results. First, agents with upward-biased valuations have an amplified effect on market outcomes because markets over-select them relative to their population share. Intuitively, markets “fish for fools.” Second, auctions are often more efficient at “fishing” than fixed-price markets because a larger share of biased agents is required for prices to move in the fixed-price setting. Third, sellers respond to this difference and choose the less efficient but more profitable selling mechanism. They may also engage in inefficient complementary actions such as overproducing the good and over-recruiting buyers. We provide evidence from several markets, including eBay, housing markets, and financial markets.
Topic
Publisher
Place of Publication
Type
Journal article
Date
2020-07
Language
ISBN
Identifiers
10.1016/j.geb.2020.03.011