Auctions are an old and widely used method for allocating goods that have become increasingly common with the advent of internet auctions sites such as Ebay. Previous economic research has shown that in an auction people tend to bid “too high,” or overbid, given the value of the item for sale. By combining brain imaging techniques with behavioral economic research, neuroscientists and economists at New York University were able to provide new insight into this tendency to overbid. Specifically, they show that the fear of losing the social competition inherent in an auction may, in part, cause people to pay too much. The research, which suggests an expanded role for neuroscience in understanding economic behavior, appears in the latest issue of the journal Science.
The goal of the study was to provide insight into the neural circuitry of experimental auctions, and then to use this insight to generate and test a novel economic approach to understand overbidding. It was conducted by a team of NYU neuroscientsts and economists. The neuroscientists were NYU Professor Elizabeth Phelps and Mauricio Delgado, now an assistant professor at Rutgers University in Newark, N.J. The economists were Andrew Schotter, a professor in NYU’s Department of Economics, and Erkut Ozbay, a former NYU doctoral student and now an assistant professor in the University of Maryland’s Department of Economics.
The researchers used functi
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