SUBJECTIVE PROBABILITIES IN GAMES: AN APPLICATION TO THE OVERBIDDING PUZZLE* |
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| Authors: | Olivier Armantier Nicolas Treich |
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| Institution: | 1. Federal Reserve Bank of New York, U.S.A., Université de Montréal, CIRANO, and CIREQ, Québec, Canada;2. Toulouse School of Economics (LERNA, INRA), France;3. We would like to thank Paul Pezanis‐Christou, Jordi Brandts, as well as seminar participants at the Institut d'Analisi Economica, the University of Auckland, Iowa State University, the 2004 ESEM conference in Madrid, the 2004 ESA conferences in Amsterdam and Tucson, the 2004 Experimental and Behavioral Economics Workshop in Calgary, and the 2005 JEE in Rennes for helpful discussions. Finally, we would like to thank three anonymous referees for the quality of their comments. All remaining errors are ours. The views expressed in this article are those of the authors and do not necessarily represent the views of the Federal Reserve Bank of New York or the Federal Reserve System. Please address correspondence to: Olivier Armantier, Research Department, Federal Reserve Bank of New York, 33 Liberty Street, New York, NY 10045. E‐mail: . |
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| Abstract: | This article illustrates how the joint elicitation of subjective probabilities and preferences may help us understand behavior in games. We conduct an experiment to test whether biased probabilistic beliefs may explain overbidding in first‐price auctions. The experimental outcomes indicate that subjects underestimate their probability of winning the auction, and indeed overbid. When provided with feedback on the precision of their predictions, subjects learn to make better predictions, and to curb significantly overbidding. The structural estimation of different behavioral models suggests that biased probabilistic beliefs are a driving force behind overbidding, and that risk aversion plays a lesser role than previously believed. |
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