Hypothetical thinking and the winner's curse: An experimental investigation
Johannes Moser  1@  
1 : Universität Regensburg - UR (GERMANY)
Universitätsstr. 31, 93040 Regensburg, Germany -  Germany

There is evidence that bidders fall prey to the winner's curse because of mistakes
in hypothetical thinking. I provide a lab experiment with two stages to investigate
this relationship. In stage I the subjects participate in a non-standard common
value auction called the wallet game in which a naive bidding strategy can lead to
both: winner's curse and loser's curse. In stage II the subjects in the treatment
group learn whether their initial bid was the winning bid or not with the possibility
to change this bid. In this sense the bidders face the same decision problems as
in stage I again but the need for hypothetical thinking is reduced in stage II. The
overall pattern of the data suggests that the problem of winner's and loser's curse
can be weakened by giving the subjects ex ante feedback about their bid, when both
are regarded separately.

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