Auctions Make Some Bid Adieu to Good Sense

Sept. 25, 2008 -- Ever wonder why you can't stop bidding on that lamp on eBay no matter how high the price gets?

You, and everyone else who overbids in auctions, may have a fear of losing, according to a new study. A team of neuroscientists and economists examined brain activity while study participants bid in auctions. The report has been published in the journal Science.

In the first round of research, 17 people participated in either a lottery or an auction with a partner. In both cases, participants could win money. To win in the auction game, participants had to outbid the partner. Researchers monitored activation in the striatum, part of the brain's reward circuitry, using fMRIs (functional magnetic resonance imaging). The primary difference in brain activity during the two different games was a more pronounced decreased blood oxygen level-dependent (BOLD) response to loss in the auction game.The more pronounced this response, the higher the bidding. This suggested to researchers that people might overbid in an auction for fear of losing.

In the second round of games, researchers aimed to test their hypothesis. There were three groups, each participating in an auction against a partner. In the control group, participants were simply given values and told to bid. In the second group, participants were told they would receive 15 extra experimental dollars if they won. In the third group, participants were given 15 experimental dollars and told they would lose that money if they lost the bid.

The third group tended to bid the highest, suggesting that the fear of losing may drive overbidding.

"These results highlight a role for the contemplation of social loss in understanding the tendency to bid 'too high' in auctions and emphasize the importance of considering social factors in economic decisions," says New York University neuroscience professor Elizabeth Phelps, one of the study's authors, in a written statement.