Imagine you’re sitting in front of your computer, sweating and panicky. No, the air conditioning is not broken. And no, you didn’t forward an inappropriate e-mail to your boss. Instead, you’re in the final few minutes of bidding in an eBay auction. As the clock ticks down, the tension mounts. Will your last bid put you over the top? Can you defeat your opponents and claim the prize?
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 Thursday 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.
Decreased brain activity in losers of the auctions was also correlated with a propensity to overbid. Intrigued, the studies authors constructed a series of games to further test the theory of fear-driven overbidding. One was framed as a "bonus" game. Participants started with no money, and the winner would receive 15 imaginary dollars. The other game set players up for a "loss." Both players started with 15 imaginary dollars, and that amount would be deducted from the loser’s coffers. These two games had the same outcome–winners profited by the same amount—but the emphasis on each was different.
Not surprisingly, the bids in the "loss" game were consistently higher than in the "bonus" game, reinforcing the author’s earlier hypothesis.
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.
Science, 2008. DOI: 10.1126/science.1158860