Why We Overbid For Old Junk On eBay

arstechnica:

Economists have known for years that people tend to overbid on items up for auction. But experts did not know the reason behind our seemingly irrational behavior.

Economists and neuroscientists from New York University teamed up to study this classic economic problem, and they published their results in Science. Using brain imaging along with carefully constructed games, the paper’s authors discovered a “fear of losing” may lie behind our propensity to overbid.

Researchers began by giving 15 people opportunities to win money in auction and lottery games, each time competing against another person. In the lottery games, participants decided whether to take part in different lottery rounds.

Auction competitors, on the other hand, chose their bid before each round. During the games, scientists watched the responses of the subjects’ striata—the brain’s reward center—using functional magnetic resonance imaging (fMRI).

The elation of winning was the same in both games, but the agony of defeat was crushing for losers of the auction. After auction, brain activity in the loser’s reward centers decreased substantially. But it hardly blipped when the person lost a lottery.

Scientists previously thought either risk aversion or the joy of winning drove overbidding, but the new study found the behavior was prompted by a “fear of losing.” The results, the authors say, were not predicted by current economic theory. Similar neuroscience studies, they added, may eventually help shape new advances in economic theory.

Photo by liewcf.

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