Separating Probability Weighting and Risk Aversion in First-Price Auctions

In first-price sealed-bid auctions, a power probability weighting function is observationally equivalent to a model of constant absolute risk aversion. By comparing auctions with different ceilings on a computerized opponent’s bid space, we can separate subjective probability weighting and risk-averse preferences from the distribution of observed bids. Our experimental data supports probability weighting distortions and risk aversion as separate drivers of bidding behaviour. We find that more than 55% of bidders exhibit behaviour consistent with risk aversion, while more than 34% of bidders exhibit some degree of probability weighting. The two channels are not mutually exclusive: around one-quarter of subjects display both biases