Investigating the Winner's Curse Based on Decision Making in an Auction Environment

Background. The majority of bidding models, such as those developed by Friedman and Gates focus on the mark-up decision. Despite a large body of literature, particularly related to the construction industry, these bidding models largely ignore human behavior. Aim. This article has two aims. The first is to contribute to the potential use of business games to study the results of auction behavior in a construction business environment. The second is to investigate the winner's curse and its effects on individual companies and the market. Method. The methodology for this study is rooted in game theory. The reasoning which leads to the winner's curse is explored through a behavioral multi-actor experiment. I developed a database-driven, online multiplayer auction game which served as a laboratory experiment. The study included 42 participants. Data were collected during the game, and debriefing results were analyzed. Results. The results show that contractors suffer from the winner's curse for a variety of reasons including their own bidding strategy, strong competition within the construction market, and inaccurate estimates of project costs. These reasons affect the behavior of contractors and the intention to win the project's bid as well as their willingness to take risks. Conclusion and Recommendations. The approach outlined in this article contributes to decision-making research in the context of the 'reverse' auction low bid method. I recommend that future researchers consider second-price, sealedbid auctions (Vickrey auctions); this type of auction is also easy to implement.