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SUBJECTIVE PROBABILITIES IN GAMES: AN APPLICATION TO THE OVERBIDDING PUZZLE *
Author(s) -
Armantier Olivier,
Treich Nicolas
Publication year - 2009
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/j.1468-2354.2009.00560.x
Subject(s) - common value auction , probabilistic logic , risk aversion (psychology) , economics , econometrics , test (biology) , psychology , computer science , microeconomics , mathematical economics , expected utility hypothesis , artificial intelligence , paleontology , biology
This article illustrates how the joint elicitation of subjective probabilities and preferences may help us understand behavior in games. We conduct an experiment to test whether biased probabilistic beliefs may explain overbidding in first‐price auctions. The experimental outcomes indicate that subjects underestimate their probability of winning the auction, and indeed overbid. When provided with feedback on the precision of their predictions, subjects learn to make better predictions, and to curb significantly overbidding. The structural estimation of different behavioral models suggests that biased probabilistic beliefs are a driving force behind overbidding, and that risk aversion plays a lesser role than previously believed.