Separating probability weighting and risk aversion in first-price auctions

In first price sealed-bid auctions, a power probability weighting function is observationally equivalent to a model with constant relative risk aversion. By comparing auctions with different ceilings on a computerized opponent's bid space, we can separate inverse S-shaped probability weighting as commonly used in the literature and risk-averse preferences from the distribution of observed bids. We find evidence to support both theories in the data. However, we also observe a significant number of violations after accounting for decision noise, which suggest that bidders' valuations may be malleable to cues of the auction environment. (c) 2022 Elsevier B.V. All rights reserved.

Automated summary

This study examines the power probability weighting function and risk-averse preferences in first price sealed-bid auctions. By observing and analyzing the influence of the auction environment, the data supports both theories, but also reveals a significant number of violations.