51 the overbidding in exotic auctions is best

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51. The overbidding in exotic auctions is best explained by (A) altruism; (B) sunk-cost fallacy and failures to randomize the bidding strategies; (C) selfishness; (D) risk aversion. Endowment effects •Narrow framing : a sequence of decisions considered separately •Broad framing : a single comprehensive decision about the entire sequence. Other behavioral patterns • Fairness effects : people enjoy having a 10% raise, but become unhappy if a colleague gets 15%. •Addictions and self-control problems : people make resolutions to diet or to quit smoking, but succumb to temptations later. •Departures from Maximization : people are willing to make choices that are satisfactory “good enough” rather than fully optimal. • Immediate Gratification Bias : subjects choose $100 now over 120 in two weeks, but choose 120 in 54 weeks over 100 in 52 weeks. Mistakes in probability judgments •Overconfidence : people overestimate their predictive abilities. • Small sample bias : People give too much weight to a small number of vivid observations. • Polarizing effects : People are stubborn and reluctant to change their minds • Long shot bias: People overestimate small probabilities, as in lotteries.
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Dictator Games Dictator games: A subject has an endowment ($10) and chooses how much of $10 to transfer to an anonymous partner. How much should a selfish agent transfer? Zero! Ultimatum Game Ultimatum Bargaining Games : One subject ( dictator ) chooses how much to offer to an anonymous partner ( recipient ), but the recipient has the option to reject in which case both get nothing. The selfish recipient should accept all positive offers. Expecting that, the selfish dictator should offer very little or $0. But in experiments: Low offers are frequently rejected (spiteful behavior). 60 and 80% of all offers are between $4 and $5. The offers are higher than in dictator games. Altruism, spite, and strategic expectation can be important in such games. Standard vs. Behavioral economic models (SEM VS BEM) Standard models are normative and prescribe how agents should behave according to some narrow concept of rationality. Behavioral models are descriptive and capture how agents really behave. BEM is aimed to be more precise than SEM for a particular class of experimental data. SEM Agents are selfish ,and do not care about fairness. They have preferences, indifference curves, and maximize utility. If payoffs are obtained in the future, then agents have time preferences consistent with the discounted utility model . (DU) If payoffs are uncertain, then agents have risk preferences consistent with the expected utility model . (EU) There’s NO framing : choices are unaffected by the verbal description of identical payoffs and any information that is logically irrelevant.
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