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Study: Fear of Losing Drives Auction Prices

Think the market is rational? Think again

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Psychology researchers have suggested fear of losing drives up auction prices, not more “rational” economic principles. So the next time you sense you’re overbidding on eBay, you probably are, not due to any theoretical “price the market will bear,” but instead due to some competitive wiring in your brain that says win at all costs.
Fear of Losing Drives Auction Prices
It’s likely a survival mechanism—most brain quirks are—remaining intact long after we removed ourselves from the harsh, bloody realities of the natural world and replaced them with theoretic constructs.*

The study was a small one, involving just 15 people given imagery dollars for participating in auctions and lotteries. Using functional magnetic resonance imaging (fMRI), scientists monitored brain activity, particularly the striata, the brain’s reward center, as the subjects carried out these scenarios. The brain scans showed the same mechanisms at work when winning either an auction or a lottery.

Losing, though, was where the key differences were. Losing a lottery was no big deal, but losing an auction caused a marked decrease in the brain’s reward centers, driving the subjects in subsequent auctions to bid more aggressively and drive up prices by overbidding. (If market speculators don’t come to mind immediately, you’re not thinking hard enough.)

The results go against previous notions of risk aversion or joy of winning being the driving forces for overbidding, suggesting fear of losing is the primary factor. Ars Technica’s Tim De Chant, in a post titled “Scientists discover why we overbid for old junk on eBay,” delivers this harrowing tidbit, coming in the wake of the apparent collapse of Nixonian economics, which the proposed fear-based federal bailout would seek to artificially perpetuate:

The results, the authors say, were not predicted by current economic theory. Similar neuroscience studies, they added, may eventually help shape new advances in economic theory.  

So, keep that in mind the next time you bid at an auction, online or off: losing may not be as painful as the potential emptiness in your wallet. 


*I know that sounds a bit obtuse, but in light of certain recent economic crises, where economists who believed theoretically-existent people would buy a bunch of houses with theoretically existent (faith-based) currency are now requesting reasonable people who don’t like existing in theoretical constructions to print money and create credit so these economists’ greed-based faiths can be realized and so all is not lost—does cat food sound appetizing to you? they ask—the fear of losing idea seems especially relevant.

 

 

Study: Fear of Losing Drives Auction Prices
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  • http://www.sensibledevelopment.com Alan Newman

    This is an interesting study, but I feel doesn’t really get to the heart of the matter.

    The winning bidder is quite often described as the person with the valuation farthest above the common value for that item. Previous studies have shown there to be a number of reasons why people ‘over bid’. Some of these can summarized as follows:

    • Information about the seller
    • Information about the product for sale, including the pictures (and their quality) accompanying the item.
    • The number of bidders competing for the item
    • The number of bids placed for the item
    • Delivery costs
    • Availability of Buy Now and its variants
    • The length of the auction and it’s end time

    There is also a lot to be said for the user experience on the auction site. How interactive is the experience? What sort of feedback do the users get when they have been outbid? Both of these factors contribute to the hustle and bustle of the auction as it closes.

    From my knowledge some of the drop off from eBay has been down to growth in niche markets and niche auction websites. Many companies – such as those in machinery sales, charity auctions and vehicle auctioning – are taking control and publishing their own auction solutions. This gives them greater control over their brand, the marketing of the auction and the products they sell to their customers. Many business to business operations see the creation of these niche markets as a main route to growth. As the economy tightens it enables then to reach wider audiences which are targeted more efficiently and in context. Additionally it is only the vendor and their suppliers who have items for sale. So the distinction is clearer and more defined.

    By having their own auction site they are better able to leverage the information with in the site to their own benefit – eBay doesn’t necessarily provide that opportunity for this. Companies can also make the best of the points I bulleted above and secure valuations (and therefore sales) at the higher end of the scale whilst also creating a climate for repeat business. In auction portals the seller is just another seller. On a dedicated site, the seller is distinct.
     

  • http://www.mycharitywins.com Mike Grindy

    This is a very interesting article on the psychology of auctions. Obviously, the sample was small and they were using imaginary money. As many people have been traders before there is a vast difference between “fake” investing/bidding and the real thing. However, I can only imagine the results being exagerated in a real life situation.

    The other comment states some obvious factors affecting the final bid of an online auction. It must be noted that there are a plethora of potential external factors that could have in impact.

    The use of a bespoke online charity auciton site could impact on the level of bidding, but it really is beyond our research to confirm this hypothesis. Quite simply eBay is where users buy cheap items and often overpay, and customised charity auctions online attract a different sort of bidder; generally a more philanthropic, well-off individual who is willing to pay over the odds before the psychology of bidding can become prevelant.

    Anyway, some useful and interesting stuff here.

    Thanks

  • http://www.mycharitywins.com Mike Grindy

    This is a very interesting article on the psychology of auctions. Obviously, the sample was small and they were using imaginary money. As many people have been traders before there is a vast difference between “fake” investing/bidding and the real thing. However, I can only imagine the results being exagerated in a real life situation.

    The other comment states some obvious factors affecting the final bid of an online auction. It must be noted that there are a plethora of potential external factors that could have in impact.

    The use of a bespoke site could impact on the level of bidding, but it really is beyond our research to confirm this hypothesis. Quite simply eBay is where users buy cheap items and often overpay, and customised charity auctions online attract a different sort of bidder; generally a more philanthropic, well-off individual who is willing to pay over the odds before the psychology of bidding can become prevelant.

    Anyway, some useful and interesting stuff here.

    Thanks

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