The Origin of the Winner's Curse: A Laboratory Study
Charness, Gary, and
Dan Levin. 2009. "The Origin of the Winner's Curse: A Laboratory Study."
American Economic Journal: Microeconomics,
The Winner's Curse (WC) is a robust and persistent deviation
from theoretical predictions established in experimental economics
and claimed to exist in field environments. Recent attempts to
reconcile such deviation include "cursed equilibrium" and level-k
reasoning. We design and implement a simplified version of the
Acquiring-a-Company game that transformed the game to an individual-choice problem that still retains the adverse-selection problem.
We further simplified the problem so that simple ordinal reasoning
could replace both Bayesian updating and contingent thinking. Our
results suggest that the WC reflects bounded rationality in that people
have difficulties performing contingent reasoning on future events.
(JEL D81, D82)
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Charness, Gary (U CA, Santa Barbara)
Levin, Dan (OH State U)
D81: Criteria for Decision-Making under Risk and Uncertainty
D82: Asymmetric and Private Information
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