That happy feeling you get from entering the highest bid at an auction does not come from winning the item. Something else is at work and it tends to result in habitual overbidding.
At a recent ceramics auctions in NYC, I bid successfully at both Christies and Sotheby’s. It was nice to get pieces that I both wanted and added to my collection. It was less pleasant to pay what I considered high prices. Nevertheless, most of the time, if I purchased these same articles at a dealer, they would cost anywhere from two to five times more than what I paid at the public sale. So, I was happy. The question is, was pleasure my overwhelming feeling the moment I purchased the items?
Elizabeth A. Phelps and her colleagues would argue that it wasn’t. The scientist from the New York University in NYC and associates would instead suggest that I bid not to win, but because I was afraid of losing. Contradictory as it seems, this is what their research data shows.
Scientific experimental auction work done as far back as 1982 suggests that bidders tend to overbid. One explanation is that bidders bid to win. They submit higher and higher offers because they have a rival for the prize. In Phelps’ and colleagues experiment, however, that didn’t happen.
The testing went like this. The seventeen volunteers participated in both an auction and a lottery. The auction was against another person and the lottery was played opposing a computer. Functional Magnetic resonance imaging (fMRI) was used to examine patterns of activation in the brain during the different trials. The goal of the fMRI study was, “to examine the effects of type of social competition (auction versus lottery) and type of incentive (money versus points) on blood oxygen dependent responses to winning or losing.” The BOLD (blood oxygen level dependent) response is related to increased blood flow secondary to neuronal activation.
Statistical maps of the brain were generated showing wins and losses across all conditions. It was the striatum, part of the basal ganglion reward system, which showed differences. Previous studies have indicated that during probability games, activation in this area was related to monetary loss and reward. There was an increase in BOLD signal for wins and a decrease for losses. Phelps and her group found the BOLD response to loss during an auction was greater in the striatum than elsewhere and that it was associated with higher bidding.
This finding, discovered through a neuroeconomics experiment using fMRI, was sufficiently interesting for the researchers to study it further. They decided to attack the same problem from a different approach, a behavioral economics study.
In order to do this, the researchers divided the volunteers into three groups to play an auction game. The controls were asked simply to make bids. Others, as part of the 'Bonus-frame factor,’ were told that if they won the auction, they would receive a bonus of 15 experimental dollars. The third ‘Loss-frame’ section was given 15 experimental dollars prior to the auction, but participants were told they would lose the money if they failed to win the auction. The difference in the groups was the framing of losing or winning. Consistent with the hypotheses that fear of losing drives a bidder, the members of the ‘Loss-Frame’ group consistently submitted higher tenders than the others.
The apparent human predisposition to overbid at auction works to the benefit of the sale house, which profits from higher selling prices.
My own opinion of my successful bidding is somewhat more complicated than the Phelps, et al experiment, and contradictory to its findings. Before the auctions, I gave considerable thought to the pieces that I wanted to buy. They were not only rare, but also fit into my existing collection. In addition, one of them had an imperfection that lent itself to some scientific analysis I was pursuing on silver decoration on Chinese porcelain. So, for me, at least in my conscious mind when I bid, I was thinking of winning (or so I thought).
Fun with Art
This information is especially timely because a new exhibit at the Walter Art Museum in Baltimore, Maryland is featuring, “Beauty and the Brain: A Neural Approach to Aesthetics.” This exhibit may be the start of others, focused on the effect of art on the brain, yet another angle of “Auction Overbidding: The drive behind it.”