Disappointment Aversion in Internet Bidding-Decisions
Supplement: Instructions
Welcome to an experiment in auctions and decision-making!
The experiment is run by faculty at the College of Management in order to examine your decision-making patterns
The experiment is not designed to test you or your skills – but to examine your personal tastes in our research-subject
Along the experiment, we will sell you gift-certificates and lotteries in auctions.
The rules of the auctions will be explained and demonstrated in the sequel.
We do not impose any limits on your participation-time.
You may proceed in your own pace with no interruptions.
First, we ask you to fill in some personal details:
Click here to proceed
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Second-price Auctions
Along the experiment we will sell you about 20 gift-certificates and lotteries over gift-certificates in "second-price auctions." The auctions that we use are called second-price auctions since the participant that submits the highest bid for the object sold in the auction, wins the auction but only pays the second-highest price among the bids submitted for the object.
The following example demonstrates the second-price auction method:
Assume that the object auctioned is a 3-months membership in a health-club X. The membership is restricted to the personal use of the auction-winner and cannot be transferred to friends, relatives or others
The auction has 6 participants: yourself and 5 other participants that will be randomly selected from the pool of participants in the experiment
Remark: We plan to run the experiment over more than 120 participants from several universities and colleges. The participants will be randomly matched to groups of 6 for running the auctions. It is most likely that you will not be familiar with the other participants in your group. Along the experiment, you will not receive any information on the identity of the other participants in your group and the bids that they have submitted. At the end of the experiment, we will let you inspect the results file to check the fairness of the experimental procedure.
In each auction, you will first receive information on the object for sale (gift-certificate)
You will then be asked to place a bid (price-offer) for the object
Each of your rivals will similarly place his/her individual bid for the object
At the end of the experiment, we will compare the 6 bids submitted for the object
Consider 3 possibilities:
A. If the bid that you submitted is higher than the 5 bids submitted by your opponents, you will win the object for the second-highest bid. For example, (the bids in the example were arbitrarily selected and are not supposed to represent actual bidding patterns in such auctions), if you have bid 500 for the gift certificate and your rivals have bid 250,100,90,240,465 for the certificate, you will win the gift certificate for a price of 465. That is, you will win 3 months membership in the health-club for a price of 465 NIS.
B. If the bid that you submitted is lower than one of the 5 bids submitted by your opponents, you will not win the object and thus pay nothing. For example, if you have bid 500 for the gift certificate and your rivals have bid 250,100,90,240,550 for the certificate, you will not win the auction and thus you will not receive or pay anything.
(In fact, the participant that has bid 550 will win the auction in this case; the winning price will be 500, the second highest price).
C. If the highest bid is submitted by more than one participant, the winner will be randomly selected amongst the participants that have submitted the highest bid. For example, if you have bid 500 for the gift certificate and your rivals have bid 250,500,90,240,500 for the certificate, the experiment program will randomly select one of the 3 bidders that have submitted the highest bid (500) as the winner. The price that the winner will pay in this case will be 500 (the second highest price is equal to the highest price when there is more than one winning bid).
Did you understand the rules of the second-price auction?
Click here to proceed.
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Self-examination: Second price auction
To verify that you have understood the second-price auction method we will now present the bids of 6 participants in a hypothetical auction and ask you to determine the winner and the price that he would pay for the object sold in the auction. You may click the following link to return to the general instructions page if you would like to examine the instructions again. The results of the auction are disclosed in the following table.
Name / BidRam / 20
Remi / 22
Ran / 4
Nira / 9
Gaddy / 26
Ayelet / 19
Please answer the next 3 questions:
[Subjects were presented with 3 multiple choice questions where they were asked to determine the winner's name, the price that the winner will pay for the object and the payoff to the subjects that did not win the auctions. Correct choices resulted in affirmative feedback; subjects that missed were invited to examine the general instructions and try again]
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What is the "optimal" bid in second-price auctions?
The gift certificates sold in our auctions are not tradable and are only intended for your personal use.
The value of each certificate for each participant depends on the individual tastes of the participant
For example, 3 months membership in a health-club may be worth 800 NIS for some participants (those that like sports/swimming) while it is only worth 100 NIS for other participants. In our words, the private value of each certificate may be considerably different for different participants.
The second-price auction method is intended to guarantee that you submit your true private value when bidding for each certificate. A fundamental result in game theory says that second-price auctions have a dominant bidding strategy:
Bid the maximal amount that you are wiling to pay for the object!
Use of any other strategy can only lower your payoffs!
The next examples demonstrate why submitting "false bids" can only decrease your payoffs:
Assume that your private value is 500; this is the maximal amount your are willing to pay for the certificate
If you submit a bid that is lower than your private-value; e.g., if you bid 450 (when your private value is 500), then you may lose the auction although you could have won the object for a price that is lower than your private value. For example, if the bids of the other participants are 250,90,300,320,460 – then, bidding 450 results in losing the auction while bidding 500 makes you the winner and gives you a 500-value certificate for a price of 460.
If you submit a bid that is higher than your private-value; e.g., if you bid 550 (when your private value is 500), then you may win the auction but pay a price that is higher than your private value. For example, if the bids of the other participants are 250,90,300,320,540 – then, bidding 550 results in winning the auction and paying 540 for a gift certificate that is worth only 500. Bidding 500 would prevent such a loss.
These examples demonstrate that "faking" your bid is not profitable in second-price auctions:
Bid the maximal amount you are willing to pay for the object!
Click here to proceed
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Few more Details before we Start the Experiment…
Submitting your bids
In each auction you will be asked to type your bid in a text box that appear after the description of the auctioned item
Lottery Tickets on Gift Certificates
As mentioned above, the experiment includes about 20 auctions. In 3 of the auctions, we sell you gift certificates. In the other auctions, we sell you lottery tickets over these gift certificates. Here is an example for such a lottery ticket:
Lottery Ticket L5
Probability 80%: Gift certificate A (3 months membership in health-club)
Probability 20%: Gift certificate B (3-course dinner in a gourmand restaurant)
The prize distribution will also be presented in the form of a pie-chart
In these auctions as well, you will be asked to post a bid for the lottery ticket by typing your price-proposal in the text box that appears below the lottery description
Remember that the second-price auction method guarantees that bidding your true value is a dominant strategy. That is, your price-proposal should reflect the maximal amount that you are willing to pay for the lottery ticket.
Click here to proceed
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Drawing the Outcomes of the Lotteries
As explained above, most of the auctions included in the experiment sell lottery tickets that pay different gift certificates with given probabilities
For example, think of a lottery that pays prize X with probability 90% and prize Y with probability 10%
The actual prize paid by such lotteries would be determined by drawing random numbers at the organizers offices in the present of independent witness according to the following procedure:
One of the witnesses will be asked to leave our office, choose an integer between 1 and 10 and write-it down on a piece of paper
In the meantime, we will use the random number generator in our personal computer to randomly draw an integer between 1 and 10
Finally, we will call our volunteer back to the office and compare the two integers
If the two integers coincide, the actual prize will be Y (the 10% probability prize)
If the two integers are different, the actual prize will be X (the 90% probability prize)
The method for determining the actual prize in other lotteries; e.g., lotteries that pay each prize with probability 50% will be similar: A volunteer will be asked to choose 5 integers between 1 and 10 and write them on a piece of papers. At the same time, we will use the computer to randomly select an integer between 1 and 10. If the randomly selected number appears on the volunteers’ list, the actual prize will be X. Otherwise; the actual prize will be Y.
To let you control the fairness of the experimental procedure, we will invite the participants in the experiment or their representatives to the prize-drawing meeting. In addition, we will send you – at the end of the experiment – a complete list of winners (identified by id's for confidentiality) and the prizes that they have won.
Actual Payment
Unfortunately, we cannot pay expensive prizes to all the winners in all the auctions that we run. At the end of the experiment, the experiment-program will randomly pick one auction for each group of 6 bidders (henceforth: the selected auction). The "selected auction" will be determined by randomly selecting one of the auctions in which the group has participated. Details on the "selected auction" and the id of the winner will be sent to the emails of the 6 members of the group. The email will disclose: (a) details on the selected auction (the gift certificate or the lottery that were selected for your group). (b) the private names and id's of the 6 participants in your auction-group (c) the bid submitted by each participant in the selected auction (d) the identity of the winner (e) the winning price as determined in the auction. In addition, we will send you information on the date where the prize-drawing will take place and an invitation to come supervise the prize-drawing process yourself. By the end of the prize-drawing process we will send to all of the participants in the experiment an email with the list of winners (identified by id) and the prizes that they have won. The winners will receive a phone number and an email address to contact the organizers.
Click to Start Bidding
First Phase of the Experiment
First, we ask you to bid for 3 gift certificates A, B and C
Gift certificate A
Weekend vacation for you and your spouse/friend in a 4 stars-hotel in Tebrias/Dead Sea/Netanya. Arrival on Thursday. Departure on Saturday. The holiday vacation can only be used by the winner and her/his spouse/friend and cannot be transferred to other parties. The gift certificate can be redeemed between 1.1.2000 and 30.6.2006 in every weekend excluding holiday weekends. Winners will be given a choice between two different hotels in the area.
What is your price proposal for gift certificate A?
My price proposal is: ______
Gift certificate B
Dinner for two (first course, main course and desert for each dinner, at your own choice) in one of the following gourmand restaurants:
(a list of 3 gourmand restaurants was presented)
The certificate can only be used by the winner and her/his spouse/friend and cannot be transferred to other parties. The gift certificate can be redeemed between 1.1.2006 and 30.6.2006. Choices are restricted to items whose price does not excess the average price in the corresponding (first course, main course, desert) menu by more than 20%.
What is your price proposal for gift certificate B?
My price proposal is: ______
Gift certificate C
Gift certificate gives you the right to choose between 2 prizes: A bottle of (type of wine was presented) Red/White wine (name of winery) or a (name of chocolatier) (net weight) chocolate box
What is your price proposal for gift certificate C?
My price proposal is: ______