Cognitive Ability and Bidding Behavior in Second Price Auctions: An Experimental Study

Abstract

This paper examines what connection, if any, there is between cognitive ability and bidding strategy in second price auctions. Despite truthful revelations being a weakly dominant strategy, previous experiments have consistently observed overbidding, which makes the use of such auctions for inferring homegrown values problematic. Examining the effect of cognitive ability is important, as it may help identify when one can reliably recover values from observed bids. The results indicate that more cognitively able subjects behave in closer accordance with theory, and that cognitive ability partially explains heterogeneity in bidding behavior. Our results suggest that considering subjects' cognitive ability in homegrown valuation studies can help identify the true underlying demand conditions.

Cross-Game Learning and Cognitive Ability in Auctions

“…Our results further complement recent contributions on the relationship of cognitive ability and overbidding in SPAs with private values (Bartling and Netzer, 2016;Lee et al, 2020). We show that cognitive ability is a robust predictor of overbidding in SPAs when participants have no prior experience in other auction formats, but not when participants have experienced bidding in FPAs.…”

“…Although bidding one's value is a weakly dominant strategy in second-price private-value auctions (henceforth SPAs), there is substantial heterogeneity in bidding behavior, even among experienced bidders (Garratt and Wooders, 2010). Li (2017) suggests that overbidding in SPAs may result from the fact that a cognitively limited agent may not recognize true-value bidding as the weakly dominant strategy in SPAs, and, indeed, recent contributions indicate that cognitive ability may predict overbidding in SPAs (see, e.g., Bartling and Netzer, 2016;Lee et al, 2020). Bidders with higher cognitive ability are more likely to adhere to true-value bidding whereas cognitively less able bidders are prone to overbid, and, among those who overbid, deviations from true values are stronger for cognitive less able bidders.…”

How to run an experimental auction: a review of recent advances

“…This concept suggests that more cognitively able bidders will understand the strategic properties of an SPA better than low cognitive ability bidders. Lee et al (2017) investigated this relationship directly by examining how individuals cognitive ability influences bid deviations in SPAs. They first measured subjects' cognitive abilities using a nonverbal Raven's Standard Progressive Matrices (RSPM) test and then classified subjects into two groups (i.e., a high cognitive ability group and low cognitive ability group) based on their RSPM test performance.…”

Forecasting Skills in Experimental Markets: Illusion or Reality?

“…However, many experimental papers have stressed the predictive power of CRT scores on traders' performance (see Breaban and Noussair, 2015;Noussair, 2 Similar results are found by Hefti, Heinke and Schneider (2018) using the canonical design of Smith, Suchanek and Williams (1988) for exploring price bubbles in asset markets. 3 High-IQ people have also been shown to induce greater truthful revelation in second price auctions (Lee et al 2020). 4 Although cognitive reflection scores correlate positively with IQ scores, both constructs are distinct because they relate to different executive functions.…”