Fishing for fools (Q2195691)

In this paper, the authors showed that two commonly used market mechanisms, fixed-price markets and auctions, amplify rather than reduce the effect of behavioral biases on prices and other market outcomes. This amplifying effect has been studied in various market settings. The main result is the following: Proposition. The effect of biased buyers on expected revenue is amplified, relative to the no-selection benchmark, \begin{itemize} \item[a)] in the auction for all \(\pi\) (probability of bias) above a low bound (of order \(\frac{1}{n^2}\)), \[ \frac{k_1}{(n-1)^2}\le \pi <1, \] \item[b)] in the fixed-price market for all \(\pi\) above a high bound (of order \(\frac{1}{n}\)), \[ \frac{k_2}{n-1}\le \pi <1. \] \end{itemize} The reader can find interesting evidence from several markets, including eBay, housing markets and financial markets.