Investigating the Winner's Curse Based on Decision Making in an Auction Environment. (June 2016)

• Record Type: Journal Article
• Authors: Karl, Christian K.
• Other Names: Wolfe Joseph guest-editor.; Kriz Willy guest-editor.
• Is Part Of: Simulation & gaming. Volume 47:Number 3(2016:Jun.)
• Page Start: 324
• Page End: 345
• Publication Date: 2016-06
• Subjects: auction -- behavior -- bidding strategy -- business games -- construction business -- construction market -- contractors -- debriefing -- decision -- game theory -- inaccurate estimates -- mark-up decision -- online game -- project bid -- project costs -- strong competition -- system dynamics -- winner's curse; Social sciences -- Study and teaching -- Periodicals; Simulation methods -- Periodicals; Game theory -- Periodicals; Sciences sociales -- Étude et enseignement -- Périodiques; Simulation, Méthodes de -- Périodiques; Jeu de rôle -- Périodiques; Éducation; Jeu d'entreprise; Jeu de simulation; Méthode de simulation; Sciences sociales; Théorie des jeux; Périodique électronique (Descripteur de forme); Ressource Internet (Descripteur de forme); 003.3
• DOI: 10.1177/1046878116633971
• Languages: English
• ISSNs: 1046-8781

Abstract

Background. The majority ofbidding models, such as those developed by Friedman and Gates focus on themark-up decision . Despite a large body of literature, particularly related to theconstruction industry, thesebidding models largely ignore human behavior. Aim. This article has two aims. The first is to contribute to the potential use ofbusiness games to study the results ofauction behavior in aconstruction business environment. The second is to investigate thewinner's curse and its effects on individual companies and themarket . Method. The methodology for this study is rooted ingame theory . The reasoning which leads to thewinner's curse is explored through a behavioral multi-actor experiment. I developed a database-driven, online multiplayer auction game which served as a laboratory experiment. The study included 42 participants. Data were collected during thegame, anddebriefing results were analyzed. Results. The results show thatcontractors suffer from thewinner's curse for a variety of reasons including their ownbidding strategy, strong competition within theconstruction market, andinaccurate estimates ofproject costs . These reasons affect thebehavior of contractors and the intention to win theproject's bid as well as their willingness to take risks. Conclusion and Recommendations. The approach outlined in this article contributes to decision-making research in the context of the 'reverse' auction low bid method. I recommend that future researchers consider second-price, sealed-bid auctions (Vickrey auctions); this type of auction is also easy to implement.