We provide a novel experimental auction design, in which (i) an exogenous decrease in the probability of winning, conditional on the
bid, reduces the optimal bid of a loss averse agent whose reference point is expectations based; (ii) observed bid distributions uniquely
identify the participants' latent value distribution and loss-aversion parameter. Experimental evidence affirms the presence of such
reference points. We show that at the estimated magnitudes of loss aversion, (a) conventional Becker, DeGroot, and Marschak (1964)
experiments may lead to large biases in estimated willingness to pay (which our design can correct for); and (b) first-price auctions
may fetch moderately higher revenue, compared with second-price auctions.
Banerji, A., and Neha Gupta.
"Detection, Identification, and Estimation of Loss Aversion: Evidence from an Auction Experiment."
American Economic Journal: Microeconomics,
Design of Experiments: Laboratory, Individual
Asymmetric and Private Information; Mechanism Design