7.8 Incorporating Behavioral Economics
In recent years both the literature and the public have paid increased attention to behavioral economics. Since in many auction experiments, subjects do not bid according to standard theory, auction theory has begun to follow the trend. Probably the most natural behavioral factor to incorporate is a utility for winning the auction. Mathematically this is equivalent to shifting the distribution of values (see Cox et al., 1988). Other more complex ways in which behavioral economics has been incorporated into auction theory are explored in this section.
In an auction, there are two types of regret: winner's regret and loser's regret. With winner's regret, the winning bidder regrets if he overpaid ...