ABSTRACT
Kagel and Levin took the “Winner’s Curse,” an important real-world issue, and found an elegant way to model the field environment in the laboratory. The Winner’s Curse, first mentioned with respect to bidding for oil leases in the 1970s, is nicely encapsulated by the saying: “You win [an auction], you lose money, and you curse.” Bidders receive private signals (drawn from a distribution) of the common value of an asset. A key issue is that people typically have problems with contingent reasoning (“hypothetical thinking”). The Winner’s Curse is found even with experienced bidders and has proven devilishly difficult to dispel. This paper demonstrates the value of the experimental approach and led to opening up a whole new area of research about how people think. It is one of the early behavioral papers that consider deviations from rationality in an arena largely devoid of social preferences.
