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strategy and business
 / Winter 2005 / Issue 41(originally published by Booz & Company)


Recent Research

On auction psychology, e-mail tactics, CEO turnover, and more.

Auction Infatuation
James R. Wolf ([email protected]), Hal R. Arkes ([email protected]), and Waleed A. Muhanna ([email protected]), “Is Overbidding in Online Auctions the Result of a Pseudo-Endowment Effect?” Click here.

Photograph by Matthew Septimus
Many people associate auctions — both the traditional and the online varieties — with bargain hunting. Yet research shows that people frequently overbid. One study, for example, found that 98.8 percent of buyers in online auctions for CDs, books, and movies overpaid. In almost 80 percent of these cases, multiple online retailers sold the item more cheaply.

Overbidding has previously been linked to the competitive nature of auctions. In particular, it was believed that bidders were susceptible to something called “auction fever” — irrational, emotionally charged overbidding. Yet there may be another explanation, according to James R. Wolf, assistant professor of information systems at the School of Information Technology at Illinois State University; Hal R. Arkes, professor of psychology at Ohio State University; and Waleed A. Muhanna, associate professor of management information systems at Fisher College of Business at Ohio State University. The authors argue that temporarily being the highest bidder during an auction can create a sense of ownership or attachment to an item, which promotes overbidding. Direct contact with the item can have the same effect.

They arrived at this conclusion after conducting two studies. The first examined 2,182 passenger vehicle auctions at the eBay Motors auction site. In a majority of cases, bidders continued to submit new bids when their previous high bids were exceeded.

In a second experiment, participants were allowed to examine a coffee mug before bidding on it. The longer people examined the item, the more they were prepared to pay for it — even when they knew they could buy an identical mug from a local store for less money.

Both cases, the authors say, are examples of a phenomenon called the endowment effect, in which possession of an item increases the value a person places on it. Because of this phenomenon, traditional retailers sometimes try to enhance the emotional attachment between buyers and their products. Some car dealerships, for example, offer 24-hour test drives to their customers, in hopes that taking the vehicle home will clinch the sale. Similarly, pet stores provide areas where customers can play with the puppies.

In auctions, being the highest bidder for a time (or even holding the item being sold) can also foster a sense of possession and create an emotional attachment to the item. The research found that the longer individuals remained the highest bidder, the more attached they became to an item — and the more likely they were to make a counterbid to regain psychological possession if they were outbid.

The authors acknowledge that their observations can also be largely explained by auction fever. The problem here, they note, “lies with disentangling the effects of bidders’ desire to win the item from the desire to simply win the auction.”

On this point, they note, previous research into auctions perhaps sheds more light. A study by Gillian Ku, assistant professor of organizational behavior at London Business School; J. Keith Murnighan, Harold H. Hines Jr. Distinguished Professor of Management and Organizations at the Kellogg School of Management at Northwestern University; and Deepak Malhotra, assistant professor at Harvard Business School, found that auction winners, even those who bid more than they originally intended, had fewer regrets than losers. This indicates a psychological change in valuation during the auction process, rather than a moment of emotionally charged madness.

This could have important implications. For example, it suggests that by prominently listing the name of the highest bidder, online auction sites could generate more activity and higher revenues for both sellers and auction providers. It also suggests that companies using online auctions for procurement should train employees who participate in these events to be, as much as possible, emotionally detached.

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