Though the risk-neutral or risk-averse utility optimal bid is 0, most buyers across many manipulations make positive bids.1 Assuming most buyers are not riskseeking, researchers have attributed positive bids to decision
The implicit decision error resulting in positive bids is that buyers don’t
understand the lottery they obtain when they make positive bids. More precisely,the error consistent with the common finding that many bids are between 50 and 75 is the faulty logic of buyers who assume that since the
firm’s value is on average 50 to the seller and 75 to the buyer, bids between 50 and 75 will on average be accepted. This reasoning ignores the adverse selection problem that sellers only accept a bid if it is greater than their value.
This paper proposes an additional explanation to decision error that may explain the positive bids. Specifically, this paper argues that people prefer to make some positive bids. There are many preferences that can explain positive bids. For instance, riskseeking preferences can explain making positive bids that result in negative expected value lotteries. However, people may also get utility from the context of the task beyond the monetary payoffs; for example, subjects may get utility from active participation, framing and/or minimizing cognitive effort (we discuss these and other preferences in depth in section 4).2 The preference hypothesis suggests the costs to buyers who fall prey to the winner’s curse may be overestimated if buyers gain utility beyond the monetary outcome. The preference hypothesis also implies a ceiling to the proportion of buyers who prefer to avoid the winner’s curse