Optimistic overconfidence in electronic reverse auctions

Abstract

Abstract Optimistic overconfidence, the overly optimistic view of uncertain events, can significantly impact bidding behavior in auctions. This bias so far has been mainly seen as a cause for the winner’s curse in common value auctions. In the present paper, we experimentally study overconfidence in the context of electronic reverse auctions. Here, overconfidence might lead to misperceptions of the bidder’s own cost situation, and of the probability of winning. We also study interactions of overconfidence with other psychometric properties of the bidder, and the format of information presentation. Both factors could mitigate the impact of overconfidence. Our results indicate that overconfidence leads to a more optimistic view of winning the auction and to more aggressive bidding. Its effect can be mitigated if bidders have a high risk literacy, but possibilities to influence it by better information representation are limited.