Understanding Overbidding: Using the Neural Circuitry of Reward to Design Economic Auctions
Open accessAbstract
We take advantage of our knowledge of the neural circuitry of reward to investigate a puzzling economic phenomenon: Why do people overbid in auctions? Using functional magnetic resonance imaging (fMRI), we observed that the social competition inherent in an auction results in a more pronounced blood oxygen level–dependent (BOLD) response to loss in the striatum, with greater overbidding correlated with the magnitude of this response. Leveraging these neuroimaging results, we design a behavioral experiment that demonstrates that framing an experimental auction to emphasize loss increases overbidding. These results highlight a role for the contemplation of loss in understanding the tendency to bid “too high.” Current economic theories suggest overbidding may result from either “joy of winning” or risk aversion. By combining neuroeconomic and behavioral economic techniques, we find that another factor, namely loss contemplation in a social context, may mediate overbidding in auctions.
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The social competition inherent in an auction drives overbidding and is related to striatal value computations for winning and losing an auction.
“That is, the social competition inherent in an auction drives overbidding and is related to striatal value computations for winning and losing an auction 88, 89.”
From The social brain and reward: Social information processing in the human striatum (2014) · cites this paper as [89]
Ventral striatum responses are involved in decisions where we are in direct competition with someone else, as in bidding for an item in an auction.
“Ventral striatum responses are also involved in decisions where we are in direct competition with someone else, as in the case of bidding for an item in an auction.”
From The social brain and reward: Social information processing in the human striatum (2014) · cites this paper as [89]
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References 19 · Cited by 180
Research works printed but not linked: 4
- [1]Rubinstein A Blundell R Newey WK Persson T Advances in Economics and Econometrics: Theory and Applications, Ninth World Congress 2006 vol. 2 246 254 Econometric Society 41, Cambridge Univ. Press Cambridge
- [2]Gul F Pesendorfer W Caplin A Schotter A Handbook of Economic Methodology vol. 1 Oxford Univ. Press New York in press
- [5]Cox JC Roberson B Smith V Smith V Research in Experimental Economics 1982 vol. 2 1 43 JAI Press Greenwich, CT
- [29]Phelps EA Sternberg R Nature of Cognition 1999 295 313 MIT Press Cambridge, MA
- Authors
- Delgado, M. R., Schotter, A., Ozbay, E. Y., & Phelps, E. A.
- Affiliations
- Rutgers, The State University of New Jersey (US)
- Corresponding author
- Phelps, Elizabeth A.
- Venue
- Science
- Published
- 2008-09-26
- Volume
- 321
- Issue
- 5897
- Pages
- 1849-1852
- ISSN
- 0036-8075 (ISSN-L)
- 1095-9203
- PMC
- PMC3061565
- OpenAlex
- W2022530056
- Cited by
- 180
- References
- 19
- Citations by year
- 2026: 2 · 2025: 1 · 2024: 4 · 2023: 12 · 2022: 9 · 2021: 7 · 2020: 6 · 2019: 5 · 2018: 12 · 2017: 6 · 2016: 8 · 2015: 17 · 2014: 14 · 2013: 16 · 2012: 14
- FWCI
- 9.12
- Type
- journal article
- Language
- en
- Open access
- green
- www.ncbi.nlm.nih.gov
- Locations
- Science (publishedVersion)
- PubMed (publishedVersion)
- PubMed Central (acceptedVersion)
- Funders
- National Institute of Mental Health (MH62104, R01MH062104)
- Topics
- Social Sciences › Decision Sciences › General Decision Sciences › Decision-Making and Behavioral Economics
- Social Sciences › Decision Sciences › Management Science and Operations Research › Auction Theory and Applications
- Social Sciences › Safety Research › Experimental Behavioral Economics Studies
- Keywords
- overbidding, auctions, reward systems, striatum, loss aversion, social competition, framing effects, neuroeconomics, behavioral economics, risk aversion
- MeSH terms
- Commerce, Competitive Behavior, Corpus Striatum, Economics, Games, Experimental, Humans, Magnetic Resonance Imaging, Motivation, Oxygen, Reward, Risk, Social Behavior, Models, Economic
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