In class we have discussed in good detail second-price sealed bid auctions. It’s easy to see that the deciding factors in the simple cases we looked at are purely economic. The optimal strategy for any bidder is to bid their private value - any more and they might pay too much, any less and they might lose at a price they were willing to pay.

Interesting things begin to happen in second-price auctions, however, when bidders are allowed multiple bids over a prolonged span of time. The question to ask is how do bidders react when they are no longer bidding on their own, but interacting with others in real time? An article published in The Journal of Interactive Marketing entitled Auction Fever: The Effect of Opponents and Quasi-Endowment on Product Valuations tackles just this question. The authors state that the outcome of such an auction is no longer based solely on economics, but on the psychological factors affecting all the potential buyers involved. They describe two main contributors to these effects: competition and what they have labeled quasi-endowment.

Competition, or what they call the “Opponent Effect” is straight-forward. For many people, participating in a multiple bid auction provides the sort of thrill of competition one would expect to see in any sport. It’s very easy to get into the competitive spirit of things without realizing the effect it has on you. The authors note that most people refer to a positive outcome as having “won”, not having “bought”, an item, and likewise for a negative outcome. This effect often causes bidders to get caught up in the moment, potentially bidding more than their private value. It becomes more important to win the perceived fight than to obtain the prize.

Quasi-endowment can be described as the effect a person feels towards an object that they possess. While it is true that in the case of an auction the buyer does not own the item in question, the authors argue that develop a sense of ownership of the item during the period in which they are the high bidder. The longer a person holds the high bid seat, the more of an attachment they develop for the item. This attachment leads to a heightened impact of a loss of the item, whether at the end of the auction or just for a short period of time. This effect has a strong psychological impact that reduces one’s ability to think rationally about the auction in progress.

Multiple biding puts bidders at a great risk of temporary irrationality (or for some, even temporary insanity). They quickly lose the ability to play the game as the intended at the start, and can very easily end up with a decidedly negative payoff. If this is the case, is it even worth it to try?