Wednesday, July 18, 2007

Economists puzzled by irrational eBay buyers -

Wow. I have not read the actual study, but if USAToday has it even half correct, this is some solid evidence that people do not always act rationally. I guess the alternative explanation will likely be that the bidder gets more utility (bragging rights?) by winning the auction.

Economists puzzled by irrational eBay buyers -
"Ulrike Malmendier, an economist at the University of California at Berkeley, tracked auctions of common items – things readily available online or in stores but offered on eBay at a discount.

Most economists assume these kinds of auctions are largely immune to the passions and unpredictabilities of ravenous bidders, she says. Simple bargain hunting, they hope, would bring out our inner homo economicus, someone who acts in their self-interest to get the best deal possible.

No such luck, she says.....

But this is where eBay users fell prey to what Malmendier and her coauthor, Stanford University economist Hanh Lee, call 'bidder's curse.' Apparently, some bidders grew so enthusiastic about winning the auction that they lost sight of the 'buy it now' price..."We found that in 43% of the auctions the bidders ended up paying more than the 'buy it now' price," Malmendier says."
43%? WOW! VERY interesting and a boost for behavioral finance.

Speaking of interesting findings, when looking for the actual article that the USA Today piece was based on (here is a "Very Preliminary" version from a few years ago), I stumbled upon this by Stefano Della Vigno and Malmendier. It looks at what people pay for gym memberships and how often they actually go. (Gym time!)


Biomed Tim said...

I'm not so sure if this suggests that ebay buyers are "irrational" so much as merely "careless"...

I would guess that 99.99% of them would prefer the cheaper "Buy It Now" price if it was pointed out to them.

Jay Muntz said...

This doesn't strike me as strange at all. In a perfectly rational market with random noise factored in (which eBay supposedly is) - I would expect that 50% of completed auctions would come in above the "Buy it Now" price and 50% would be below.

"Buy it Now" is like a futures contract on the auction. In setting the "But it Now" price, the seller is trying to predict what the final price of the auction is going to be. "Buy it Now" transactions are quicker than regular auctions, so the seller benefits from them if he can sell for the same price, more quickly.

The study says sellers come in "under" 43% of the time, which means that they come in "over" 57% of the time.

Sounds to me like "Buy it Now" is a pretty good predictor of what the final price will be. What exactly is irrational about this?

Anonymous said...

I read that hedge funds search for gift cards on Ebay as a barometer of a company's current outlook. Gift cards at more desirable stores would sell at close to cash value.

What is amazing is that sometimes people bid higher than the cash value.

Anonymous said...

I think sometimes you have the choice to either make a Bid or use the buy it now. After you bid the buy it now is removed and if you have some other bidders interested in the item it might end in a higher price than the original buy it now. It is a risky choice but in no sense its irrational as you can´t forecast the interest in the item (in terms of # bidder and $$).


FinanceProfessor said...

I may be wrong, but given that the products that were being examined were books and such (i.e. replenishable)I think the "BUY IT NOW" button stays on. (or at worst would reappear as soon as current auction is ended and the next (same item) begins.

That said that is only my understanding of the auction process.