On Saturday 19 May 2012, The University of Nottingham opened its doors for the fourth May Fest, an annual event which aimed to present innovative research from diverse fields to a broader non-academic community.
This year, the School of Economics invited the Centre for Decision Research and Experimental Economics (CeDEx) to participate with some hands-on experiments that could give a glimpse of what we usually study in the lab.
On one of the stands we got assigned, Jeroen Nieboer and I had the opportunity to exemplify with a simple experiment what the Winner’s curse was about.
Specifically, the game designed gave participants the chance to bid for a hypothetical company with the following characteristics:
- Its current value was equally likely to be an integer number in the 0-100 range and its actual value was determined by a draw from a bingo cage.
- Purchases occurred only when a bid was greater than the current value.
- If acquired, the company’s value would increase 1 1/2 times.
Once children and their parents submitted their bids, it was not rare to see them overbid and fall prey of the winner’s curse for reasoning like this: “My guess of the current value of the company is 50. The value to me will then be one-and-half times this figure, so 75. If I put in a bid below 75 but above 50, say 60, the bid will probably be accepted and I will probably make a profit.”
We then showed them that such logic was not right by presenting examples of the kind: “If your bid of 60 is accepted, that means that the current value of the company is 60 or less. Given this extra information and that each value between 0 and 60 is equally likely, the bidderʼs best guess of the current value is 30. So the expected value to the bidder is 45 and the bidder should expect to make a loss of 15.”
Most of the participants were surprised when they realised that in this game, making a loss was more likely than a profit. But they were even more surprised when some real-world examples were shown.
I think that this was a great experience and also a fantastic opportunity to show to a non-academic community how Behavioural Economics tries to model and experiment with certain anomalies of our choices. Looking forward to the next one!