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Science 26 September 2008:
Vol. 321. no. 5897, pp. 1849 - 1852
DOI: 10.1126/science.1158860
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Reports

Understanding Overbidding: Using the Neural Circuitry of Reward to Design Economic Auctions

Mauricio R. Delgado,1 Andrew Schotter,2 Erkut Y. Ozbay,3 Elizabeth A. Phelps4*

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.

1 Department of Psychology, Rutgers University, Newark, NJ 07102, USA.
2 Department of Economics, New York University, and Center for Experimental Social Science, New York, NY 10003, USA.
3 Department of Economics, University of Maryland, College Park, MD 20742, USA.
4 Department of Psychology, New York University, New York, NY 10003, USA.

* To whom correspondence should be addressed. E-mail: liz.phelps{at}nyu.edu

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THIS ARTICLE HAS BEEN CITED BY OTHER ARTICLES:
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