Understanding overbidding: Using the neural circuitry of reward to design economic auctions

Mauricio R. Delgado, Andrew Schotter, Erkut Y. Ozbay, Elizabeth A. Phelps

Research output: Contribution to journalArticle

Abstract

We take advantage of our knowledge of the neural circuitry of reward to investigate a puzzling economic phenomenon: Why do people overbid in auctions? Using functional magnetic resonance imaging (fMRI), we observed that the social competition inherent in an auction results in a more pronounced blood oxygen level-dependent (BOLD) response to loss in the striatum, with greater overbidding correlated with the magnitude of this response. Leveraging these neuroimaging results, we design a behavioral experiment that demonstrates that framing an experimental auction to emphasize loss increases overbidding. These results highlight a role for the contemplation of loss in understanding the tendency to bid "too high." Current economic theories suggest overbidding may result from either "joy of winning" or risk aversion. By combining neuroeconomic and behavioral economic techniques, we find that another factor, namely loss contemplation in a social context, may mediate overbidding in auctions.

Original languageEnglish (US)
Pages (from-to)1849-1852
Number of pages4
JournalScience
Volume321
Issue number5897
DOIs
Publication statusPublished - Sep 26 2008

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