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Learning Direction Theory and the Winner's Curse

Published online by Cambridge University Press:  14 March 2025

Reinhard Selten ,
Klaus Abbink  and
Ricarda Cox
Reinhard Selten*
Affiliation:
University of Bonn
Klaus Abbink*
Affiliation:
University of Nottingham
Ricarda Cox
Affiliation:
University of Bonn
*
email: [email protected]
email: [email protected]
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Abstract

We report an experiment on a decision task by Samuelson and Bazerman (1985). Subjects submit a bid for an item with an unknown value. A winner's curse phenomenon arises when subjects bid too high and make losses. Learning direction theory can account for this. However, other influences on behaviour can also be identified. We introduce impulse balance theory to make quantitative predictions on the basis of learning direction theory. We also look at monotonic ladder processes. It is shown that for this kind of Markov chains the impulse balance point is connected to the mode of the stationary distribution.

Keywords

experimental economicslearningindividual decision making

JEL classification

C91: Laboratory, Individual Behavior D81: Criteria for Decision-Making under Risk and Uncertainty D83: Search • Learning • Information and Knowledge • Communication • Belief • Unawareness
Type
Research Article
Information
Experimental Economics , Volume 8 , Issue 1 , April 2005 , pp. 5 - 20
Copyright
Copyright © 2005 Economic Science Association

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