
"Naive Bidding"
George Deltas and Richard EngelbrechtWiggans


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Abstract : 

This paper presents an equilibrium explanation for the persistence of naïve bidding. Specifically, we consider a common value auction in which a “naïve” bidder (who ignores the Winner’s Curse) competes against a fully rational bidder (who understands that her rival is not). We show that the naïve bidder earns higher equilibrium profits than the rational bidder when the signal distribution is symmetric and unimodal. We then consider a sequence of such auctions with randomly selected participants from a population of naïve and rational bidders, with the proportion of bidder types in the population evolving in response to their relative payoffs in the auctions. We show that the evolutionary equilibrium contains a strictly positive proportion of naïve bidders. Finally, we consider more general examples. In these examples (i) a naïve bidder matched against a rational bidder does worse than his rational opponent but (ii) a naïve bidder matched against a rational bidder does better than a rational bidder matched against another rational bidder. Again, the evolutionary equilibrium contains a strictly positive proportion of naïve bidders 



Manuscript Received :
2000

Manuscript Published :
2000




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