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Electron Markets DOI 10.1007/s12525-011-0068-9

GENERAL RESEARCH

Understanding auction fever: a framework for emotional bidding Marc T. P. Adam & Jan Krämer & Caroline Jähnig & Stefan Seifert & Christof Weinhardt

Received: 15 September 2010 / Accepted: 12 July 2011 # Institute of Information Management, University of St. Gallen 2011

Abstract Auction fever is a multifaceted phenomenon that is frequently observed in both traditional and Internet auctions. In order to gain a better understanding of its causes, we develop a conceptual framework to analyze emotions in auctions, which is based on an exhaustive literature review. The framework integrates rational calculus with emotional aspects and suggests that emotional processing is triggered at three different stages of an auction: First, the economic environment can affect a bidder’s level of perceived competition and thus influence the bidding strategy prior to the auction. Second, auction events may have ramifications on the bidder’s emotional state during the auction due to previous investments or perceived

Responsible editor: Hans-Dieter Zimmermann M. T. P. Adam (*) : J. Krämer : S. Seifert : C. Weinhardt Institute for Information Systems and Management, Karlsruhe Institute of Technology, Kaiserstr. 12, Bldg. 01.80, 76131 Karlsruhe, Germany e-mail: [email protected] J. Krämer e-mail: [email protected] S. Seifert email: [email protected] C. Weinhardt e-mail: [email protected] C. Jähnig Chair of Business Education and Human Resource Development, Georg-August-University Göttingen, Platz der Göttinger Sieben 5, 37073 Göttingen, Germany e-mail: [email protected]

ownership. Third, past auction outcomes may impact future bidding behavior through emotions such as the joy of winning or loser regret. Auction fever, eventually, is a phenomenon that results from the interplay of these emotional processes and causes a bidder to deviate from an initially chosen bidding strategy. Keywords Auctions . Auction fever . Emotions JEL D03 . D44 . L81

Introduction Auctions are frequently employed as market institutions that facilitate dynamic pricing. In particular Internet auctions have turned out to be “one of the greatest success stories of web-based services” (Ariely and Simonson 2003). The success of Internet auctions has often been attributed to reductions of transaction costs, the large number of potential buyers, and the independence of time and space (Ockenfels et al. 2006). However, these characteristics apply to electronic retail sites in general. The popularity of Internet auctions is somewhat counterintuitive from the consumer’s perspective as several field studies have revealed that auctions often yield higher prices than fixed price offers on retail sites (e.g. Lucking-Reiley 1999; Malmendier and Szeidl 2008). Ariely and Simonson (2003) reported that 98.8% of the observed auctions yielded higher prices than commodities on retail sites with bidders paying on average 15.3% more. Lee and Malmendier (2007) reported that 42% of the analyzed auctions yielded higher prices than simultaneously listed fixed price offers on the very same computer screen. Hence, the phenomenon cannot be explained by search costs alone.

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A reason for these high prices may be that auctions and their inherent social interactions are simply more exciting (e.g. Möllenberg 2004; Stern et al. 2008). Winning, losing, or simply participating in an exciting auction can, therefore, be another driver of the success of Internet auctions. Ariely and Simonson (2003, p. 116) noted that “participating in an auction is likely to require a greater involvement of the consumer than a purchase of the same item in a fixed price market.” Bapna et al. (2001) argued that consumers have to decide whether to purchase at an unexciting fixed price or to experience the “bazaar-like competitive atmosphere” of an auction. Another phenomenon frequently observed in traditional and Internet auctions is often referred to as “auction fever” (e.g. Heyman et al. 2004; Ku et al. 2005). Under auction fever, the bidders’ “adrenaline starts to rush, their emotions block their ability to think clearly, and they end up bidding much more than they ever envisioned” (Murnighan 2002, p. 63). Despite its popularity, little is known about the causes and mechanisms of auction fever. Auction theory has developed a sophisticated toolkit to investigate the behavior of auction participants theoretically (see e.g. Klemperer 1999 for an overview). However, traditional auction theory focuses on purely rational bidders and, thus, cannot explain auction fever. This paper provides an exhaustive review of literature from both economics and psychology and establishes the current state of research on the role of emotions in electronic auctions. Furthermore, based on the literature, we propose a conceptual framework on bidders’ emotional processing that occurs during the dynamic process of auctions. We explicitly formulate the theoretical propositions on which the framework is built and highlight those that should be further investigated by future research. Finally, we propose a definition of auction fever within the realm of our emotional bidding framework. In this way, we link auction fever to its underlying emotional processes and, thereby, contribute to the understanding of the auction fever phenomenon.

A framework for emotional bidding The microeconomic perspective Since Vickrey’s (1961) seminal paper, microeconomic literature has analyzed auctions as non-cooperative games of incomplete information (e.g. Krishna 2002). According to McAfee and McMillan (1987, p. 701) auctions are “a market institution with an explicit set of rules determining

Auction System & Environment

Bidding Strategy / Behavior

Fig. 1 Conceptualization of the microeconomic perspective on auctions

resource allocation and prices on the basis of bids.” The players in these games are the bidders who are characterized by their preferences and their beliefs with respect to the preferences and the information of other bidders. In what follows, we will refer to the rules of an auction as well as to the characteristics of the bidders as the auction system & environment. As is common in the theoretical analysis of games, each player (bidder) chooses a strategy, which specifies his or her action for any stage of the game (e.g. Osborne and Rubinstein 1998). The combination of all bidders’ strategies determines the auction outcome as well as possibly certain events during the auction process. We conceptualize this traditional microeconomic view in Fig. 1. The auction system & environment comprises the rules of the auction as well as the preferences and the information the bidders possess. Based on this environment each bidder chooses a bidding strategy. In a first-price sealed-bid auction, for example, the strategy can be as simple as a real number, the bid. In an English auction, a strategy is more complex and specifies an action (behavior) for any potential state or event during the auction. These events stem from the interaction of the bidders, i.e. the bids or dropouts of individual bidders and finally result in a particular auction outcome. Game theoretical models assume that bidders are rational in the sense that they maximize their expected utility taking the interdependencies with the actions and strategies of other bidders fully into account. They evaluate all possible states of the auction and all possible actions of all players independent of whether these states will be reached in a particular auction or not and solve the game by backward induction (Fudenberg and Tirole 1998). This means that the behavior of a bidder is not affected by events that might occur in an auction. Rather, all possible contingencies are dealt with by a complete plan of action that is made up prior to the start of the auction and remains unaffected by its actual course. Thus, a bidder’s strategy only depends on the auction system & environment. Even though the auction outcome and all intermediate events are ex-ante unknown to the individual bidders, they are fully determined by the combination of their strategies. In particular, there are no cycles or feedback loops in this traditional perspective: being a complete behavioral plan, a bidder’s strategy considers any possible (future) event and defines the resulting action by the respective bidder. In other words, the course of actions and events is completely determined before the auction actually starts. Moreover, it is unaffected by parameters like the layout of a bidding software’s screen, Auction Events

Auction Outcome

A framework for emotional bidding

the wording of information, or the speed of an auction. In particular, the course of an auction is unaffected by emotions that might arise during the auction. Emotional bidding We acknowledge that the traditional view of auction theory with its fully rational bidding process described above is a useful benchmark. However, we believe that the picture is not complete, in particular with respect to bidding phenomena, such as auction fever. In the following, we propose an emotional bidding framework that is based on a comprehensive review of interdisciplinary research on auctions and emotions, and that can be contrasted and examined in future research. The framework incorporates the microeconomic perspective, but additionally considers the interaction between cognitive reasoning and emotional processing. In this context, we define an emotion in the spirit of Myers (2004, p. 500): Definition (Emotion). An emotion is a subjectively experienced state that is characterized by a particular, conscious experience and generally accompanied by physiological arousal and expressive behavior. Usually, an emotion is triggered in response to an emotionally competent stimulus (Bechara and Damasio 2005), i.e. a particular object or event associated with a subjective significance. The extension of the traditional bidding framework follows the conceptual model of Rick and Loewenstein (2008) on emotions in economic behavior and is depicted in Fig. 2. The upper part of the framework represents the previously introduced theoretical bidding process, whereas the lower part of the framework formalizes a participant’s emotional processing during an auction. The traditional bidding process is intertwined with the psychological part of the framework at different stages of the auction. The Fig. 2 Emotional bidding framework

downward pointing arrows denote those stimuli of an auction that have been linked to emotional processes in previous research. Those emotional processes are triggered at the level of the auction system & environment (e.g. a ticking clock raises nervousness; Murnighan 2002), the auction event that is often related to interactivity (e.g. becoming the current high bidder) or the auction outcome (e.g. gaining information about winning or losing the auction). Following Rick and Loewenstein (2008), we differentiate between emotions that are directly triggered by an emotional stimulus (immediate emotions) and expected emotions that influence decision-making via a less direct pathway. Immediate emotions are direct responses to relevant auction events or outcomes; like a burst of anger when learning about having lost an auction (Loewenstein 2000). In contrast, expected emotions are not directly experienced emotional responses to an auction stimulus, but expected emotional reactions to the anticipation of an auction outcome. Rick and Loewenstein (2008, p. 138) argued that “expected emotions are those that are anticipated to occur as a result of the outcomes associated with different possible courses of action.” A common example for an expected emotion is (expected) regret (Connolly and Butler 2006; Zeelenberg 1999). When an auction participant intends to place a bid, he or she can anticipate to experience regret about his or her decision when learning the auction outcome (Engelbrecht-Wiggans and Katok 2008). Anticipating an expected emotion can itself trigger an immediate emotion (Rick and Loewenstein 2008). This link is denoted by P2b in the framework. Immediate emotions are “immediate visceral reactions (e.g. fear, anxiety, dread)” (Loewenstein et al. 2001). For instance, expected regret can induce the immediate emotion of fear of regret. A central element within the extended framework is the emotional state (Russell and Mehrabian 1977; Ding et al. 2005), as this state canalizes the influence of the emotional

Auction System & Environment

Bidding Strategy / Behavior

Auction Events / Interactivity

P5

P6

P3

Auction Outcome

P4

P1 Expected Auction Outcome

Emotional State

P2a

Expected Emotions P2b

Immediate Emotions

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reactions in the course of the auction (Bosman and van Winden 2002). In this paper, we define the emotional state as the overall state of a bidder’s emotions at any given time. Thus, the emotional state is ongoing and “the individual is never without being in some emotional state” (Zajonc 1984, p. 21). In contrast, immediate emotions are short bursts of emotional processing in response to specific events. In other words, the emotional state is a continuous construct that is subject to volatile immediate emotions. According to Rick and Loewenstein (2008), the frequency and intensity of immediate and expected emotions directly affect the emotional state (see Fig. 1). Moreover, they argue that a sufficiently strong immediate emotion can even directly influence behavior, overruling cognitive decision-making. The remainder of this article identifies and characterizes the chain of emotional processes that are induced by the auction outcome (Section Emotional processing induced by the auction outcome), the auction system & environment (Section Emotional processing induced by auction events), and auction events (Section Emotional processing induced by the auction system & environment). In each section, we provide empirical and theoretical evidence from the literature in support of the links in the framework (P1– P5). In Section Auction fever in the emotional bidding framework, we propose that the final result of these emotion triggering processes is a change of the auction participant’s ongoing emotional state, which in turn affects behavior (P6). This is interpreted as auction fever. Section Conclusions concludes and Section Directions for future research identifies open research questions and avenues for further research.

Proposition 1 is straight forward and suggests that, for example, winning or losing an auction can directly induce immediate emotions like the joy of winning or the frustration of losing. Such emotions can impact bidding behavior in subsequent auctions (Engelbrecht-Wiggans and Katok 2008). However, a bidder might not only experience immediate emotions in the moment an auction outcome materializes, but already anticipate expected emotions regarding the expected auction outcome (P2a). As argued by Rick and Loewenstein (2008, p. 138), expected emotions are not actually experienced, “they are only cognitions about future emotions.” Thereby, the set of possible immediate emotions also determines the set of possible expected emotions regarding the expected outcome of a decision (Rick and Loewenstein 2008). For instance, if an auction outcome can induce loser regret, a bidder can anticipate this emotion before placing a bid and reflect it in the actual bid (Filiz-Ozbay and Ozbay 2007). Without loss of generality, we may therefore refer to each emotion as an immediate (i.e. actual) or expected emotion. Moreover, recall that P2b denotes that anticipating an expected emotion can itself trigger an immediate emotion (Rick and Loewenstein 2008). We conceptualize the immediate and expected emotions that were investigated in the literature as responses to the (expected) auction outcome in Fig. 3. Emotions can either be “aversive” or “rewarding” (Frijda 1986) and, thus, are colored in red and green, respectively. In the following, we discuss several studies that have investigated these emotions in auctions and are thus connected to P1 and P2. Winner and loser regret

Emotional processing induced by the auction outcome In this paper, we define the auction outcome as the set of information a bidder is provided with after an auction has ended. In contrast, the expected auction outcome denotes the expectations a bidder forms about the actual auction outcome before placing a bid. The emotional bidding framework proposes that the actual as well as the expected auction outcome can directly or indirectly induce immediate emotions, which in turn affects a bidder’s emotional state and eventually his or her bidding behavior. The proposed link between (expected) auction outcome and immediate emotions is expressed by Proposition 1 (P1) and Proposition 2 (P2), which are also depicted in Fig. 2. Proposition 1 (P1). The actual auction outcome can directly induce immediate emotions. Proposition 2 (P2). The expected auction outcome may induce bidders to anticipate expected emotions (P2a), which may in turn induce immediate emotions (P2b).

Humphrey (2004, p. 839) defined regret as an “aversive emotion” a decision-maker experiences upon the discovery that a higher level of utility could have been gained, if one had made a different choice in the past. Human decision(Expected) Auction Outcome LOSE

WIN

(Expected) Loser Regret

(Expected) Winner Regret

(Expected) Joy of Winning

Monetary

Monetary

Monetary

Social Competition

Social Competition

Expected Emotions / Immediate Emotions

Fig. 3 Conceptualization on possible emotional responses to (expected) auction outcomes

A framework for emotional bidding

makers tend to anticipate future regret and consequently seek to avoid this emotion by changing their behavior. Engelbrecht-Wiggans (1989) introduced a model of postauction regret for first-price sealed-bid (FPSB) auctions and shows that the level of regret depends on the specific information that is provided to the winners or losers of an auction. If bidders know that they will receive post-auction information on the highest and second highest bid, they can anticipate winner and loser regret during decision-making and reflect respective concerns in their bidding strategy. Engelbrecht-Wiggans (1989) showed that a bidder’s utility maximizing bidding strategy is independent of regret, if the bidder puts equal weights on winner and loser regret. However, bidders place higher (lower) bids, if they put more weight on loser (winner) regret. Similarly, Filiz-Ozbay and Ozbay (2007) conducted FPSB auctions in which either the highest bid (loser regret), the second highest bid (winner regret), or no such information (no feedback) was revealed. Filiz-Ozbay and Ozbay found support for expected loser regret, as bidders placed significantly higher bids under this condition. However, subjects did not seem to expect winner regret. Based on a post-auction questionnaire Filiz-Ozbay and Ozbay concluded that loser regret is significantly stronger than winner regret. However, although expected winner regret is not reflected in the bidding behavior, it is still experienced as soon as the auction outcome is revealed. Engelbrecht-Wiggans and Katok (2008) also found support for the effect of loser regret. Furthermore, they observed a significant decrease of bids over time in the winner regret treatment. Engelbrecht-Wiggans and Katok (2008) concluded that bidders can only then reflect winner regret in their behavior, if they have “actually experienced it several times.” However, although winner regret can supposedly be learned over time, bidders still “put more weight on the loser’s regret than on the winner’s regret.” The previous studies model regret exclusively as a function of the additional monetary payoff an ex-post optimal bidding strategy would have achieved (Engelbrecht-Wiggans 1989). In other words, this particular concept of regret does not comprise aversive feelings of losing the social competition as depicted in Fig. 3. In contrast, Delgado et al. (2008) took these social aspects into account. They compared the activation of different regions in the brain between participants of a FPSB auction and a simple lottery. The authors concluded that the “fear of losing the social competition” leads to overbidding in FPSB auctions and that “the anticipation of the unpleasant state associated with loss” induces participants to increase their bids. Joy of winning The expected utility from winning an auction is the actual reason for bidders to participate. The immediate emotion

triggered by the event of winning an auction and receiving a positive monetary payoff is referred to as joy (Goeree and Offerman 2003) or love of winning (Morgan et al. 2003; Kogan and Morgan 2009). Traditionally, the utility from winning an auction depends only on monetary payoffs (Vickrey 1961). However, bidders may also derive a utility from winning the social competition of an auction that is “over and beyond any monetary payoffs” (Cooper and Fang 2008). With respect to the expected joy of winning, the results in the literature are mixed. Cooper and Fang (2008) reported that overbidding can partly be explained with joy of winning and spite. Andreoni et al. (2007) found that expected joy of winning is only responsible for at most 10% of the observed overbidding. Goeree and Offerman (2003) found no support for the theory of expected joy of winning and explain their results with loss aversion. Similarly, Delgado et al. (2008) argued that it is expected loser regret and not expected joy of winning that leads to overbidding. While the empirical evidence on the impact of the joy of winning on auction outcome seems currently weak, it is yet too early to discard this relationship from the emotional bidding framework. It is important to note, for example, that (1) the literature on joy of winning mainly focuses on static (offline) auctions and that (2) the results of these studies are based on experiments in a neutral laboratory environment. It is plausible that joy of winning might be strongest outside of the laboratory in real and dynamic (online) auctions where bidders can develop personal rivalries in the inherent social competition.

Emotional processing induced by auction events Auction events denote the information (e.g. on the bidding history or the current high bidder) that is revealed to some or all bidders during the course of an auction (i.e. after the first bid has been placed and before the auction outcome is revealed). Auction events only occur in dynamic (online) auctions (e.g., eBay auctions). In contrast, a first-price sealed-bid (FPSB) auction is a static process, in which a bidder may only place one single bid (McAfee and McMillan 1987). Thus, by construction, the set of auction events is empty in a FPSB auction. Auction events (or rather the information that is transported by them) may, thus, be an important means of real-time interaction between bidders that might enkindle several emotions.1 Jennings and Dorina (2003) supported this view by proposing that interactivity in new media yields the potential to induce arousal and leads to emotion-related phenomena. It is important to note, however, that auctions in general are games with strategic interaction, because the 1

We thank an anonymous referee for pointing this out.

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outcome of a player does not only depend on his or her own decisions, but also on the decisions of at least one other player (Rasmusen 2007). In dynamic auctions, however, a bidder might experience a higher degree of interactivity because a bidder’s information set can be updated via auction events throughout the auction process. Ariely and Simonson (2003) noted that the multi-stage process of dynamic auctions makes consumers “highly involved.” Accordingly, the phenomenon of auction fever seems to be observed particularly in dynamic auctions (Ockenfels et al. 2006). The emotional bidding framework proposes two different emotional processes that may be triggered by an auction event: Proposition 3 (P3). Auction events can directly induce immediate emotions. Proposition 4 (P4). Auction events can influence a bidder’s perception about the expected auction outcome, and thus (via P2) indirectly induce immediate (anticipatory) emotions. P3 suggests a direct link between auction events and immediate emotions. For instance, a bidder might experience anger when being out bidden or joy when becoming the current high bidder. P4 states that auction events can lead to a change in a bidder’s expectations regarding the auction outcome and via P2 eventually have an influence on immediate emotions as well. For instance, when becoming the high bidder, a bidder might feel in possession of the item, which we refer to as perceived ownership. This, however, may not only change a bidder’s expectations about the auction outcome, but also the set of expected emotions. Related empirical research finds that in particular a bidder’s “previous investments” and “perceived ownership” may trigger changes in expected auction outcome as denoted by P4.2 This is derived in more detail in the following sections. Previous investments The terms “escalation of commitment” (Staw 1976; Ariely and Simonson 2003) or “sunk cost fallacy” (Arkes and Blumer 1985; Friedman et al. 2007) describe the phenomenon that human decision-makers often put too much emphasis on recouping previous investments (i.e. spent resources like time or money). A decision-maker should actually ignore sunk costs associated with previous investments and only consider future costs and benefits (Arkes and Blumer 1985). In the context of auctions, bidders invest 2

To the best of our knowledge there are no studies to date that have systematically investigated the hypothesized direct relationship between auction events and immediate emotions (P3). In the conclusion, we argue that this should be subject to future neuro- or physioeconomic studies.

auction fees (Ivanova-Stenzel and Salmon 2004), search costs (Ariely and Simonson 2003), transaction costs (Carare and Rothkopf 2005), or waiting costs (Carare and Rothkopf 2005). These investments are sunk and can only be converted into a payoff if the auction is won eventually. However, they also influence the level of commitment that bidders experience in the course of an auction and might in turn fuel the desire to continue bidding. This so-called self justification bias is the most prominent explanation of escalation of commitment to date (Staw and Ross 1989; Park et al. 2008). The traditional self justification explanation for the phenomenon of escalation of commitment is based on mechanisms to reduce cognitive dissonance (Festinger 1957). However, there is a debate on whether this cognitive approach alone is sufficient to fully explain the phenomenon of escalation of commitment, or whether it also comprises increased levels of arousal and, thus, a change in the bidder’s emotional state. Ku et al. (2005) reported that high sunk costs lead to increased self-reported levels of arousal and higher bidding activity. Ku et al. (2008) argued that if bidding itself is arousing, this can “feed a vicious cycle of bidding and overbidding.” In addition to the indirect waiting, bidding, or search costs, some auction sites levy direct monetary charges such as entry or bidding fees. While entry fees are charged for the right to actually participate in an auction, bidding fees are charged for every single bid a bidder submits. Meyer (1993) reported that 59% of the participants do not consider the entry fee to be sunk. 93% of these bidders increased their bids in order to “increase their chances of winning the auction.” One prominent example for bidding fees is swoopo.com, an Internet auction platform, which charges a fee of 60 US cents for placing a bid in fixed increments of 12 US cents. With respect to the debate on whether escalation of commitment is a purely cognitive phenomenon or whether it also comprises arousal, it is interesting to observe that Swoopo advertised “pulse up, price down” and promoted itself as an “entertainment shopping” platform (swoopo.com, 2009). Adam et al. (2009) analyzed the Swoopo auction mechanism in a laboratory experiment and showed that bidders’ physiological responses were higher for high bidding fees. Applying the above cited evidence to the emotional bidding framework we propose the following process (P4): The auction event of learning that previous investments have not led to success is the starting point for escalating commitment. For example, having invested resources into bidding on a rare collector’s item and being outbid on this item multiple times (auction event) eventually leads to the expectation of losing the auction (expected auction event). The expected emotion to this anticipated loss gets more intense the more resources the bidder has previously invested. The fear of actually having to experience these

A framework for emotional bidding

unpleasant emotions leads to an, itself unpleasant, (anticipatory) immediate emotion that can influence the emotional state of the bidder and possibly to more aggressive bidding behavior. Perceived ownership Perceived ownership refers to the conjecture that being the high bidder in an ascending auction can make a bidder “feel like already owning the item” (Ehrhart et al. 2008). Thaler (1980) introduced the term “endowment effect” for the observation that a human decision-maker usually values a commodity more if one owns the item. Kahneman et al. (1990) argued that the endowment effect causes a shift of the decision-maker’s reference point and can thus be explained by prospect theory (Kahneman and Tversky 1979): while buying an item is regarded as a gain, selling the same item is regarded as a loss. However, to be precise the endowment effect described by Thaler (1980) and Kahneman et al. (1990) focuses on actual ownership. In contrast, the “pseudo-endowment effect” (Ariely and Simonson 2003) refers to situations in which a human decision-maker develops a psychological ownership of an item, without actually owning the item (yet). In the context of auctions, the current high bidder can get more attached to an item, as the item becomes “a part of his or her psychological endowment” (Ariely and Simonson 2003). Similar to the endowment effect, this psychological ownership can induce a shift of the bidder’s reference point and, in combination with loss aversion, increase his or her valuation for the commodity. Consequently, the pseudoendowment effect might be the reason for changing one’s expectations about the auction outcome (P4). A concept closely related to the pseudo-endowment effect is the “attachment effect” (Köszegi and Rabin 2006), which argues that the reference point of a decision-maker is affected by subjective “probabilistic beliefs” about the outcome of a situation. In auctions, this refers to the phenomenon that the current high bidder in an auction may perceive an “increase in the expected [subjective] probability of winning” the auction (Ehrhart et al. 2008, p. 3). In contrast, the pseudo-endowment effect refers to an increased attachment with an item due to psychological ownership. Therefore, as argued by Ehrhart et al. (2008), both effects comprise a reference point shift, which is originated in perceived ownership—due to psychological attachment and/or probabilistic beliefs and are, thus, in line with P4. In other words, perceived ownership intensifies the expected emotions in response to the expected auction outcome. Simply spoken, the expectation of losing something that has already been perceived as owned is expected to feel much worse than something that has not been subjectively endowed. The fear of this expected emotion is

the immediate emotion, which will unfold its influence on decision-making via the pathway of the emotional state.

Emotional processing induced by the auction system & environment Finally, the emotional bidding framework also implies that the auction system & environment, i.e. all information that is known to the bidders before the first bid has been placed, can already have a direct influence on their emotional state (P5). Proposition 5 (P5). The auction system & environment can directly influence a bidder’s emotional state. The auction system & environment not only comprises the rules of the auction, but also the design and the interfaces of the auction system. The design of the auction system is often streamlined to increase the perceived competition among bidders. The degree of perceived competition subjectively experienced by bidders is frequently credited as one of the main inducers of an emotional state. Ku et al. (2005) referred to this emotional state as “competitive arousal.” We argue that the auction system & environment can facilitate competitive arousal through time pressure, spotlight effects, and rivalry. Time pressure Research on decision-making has shown that time pressure is a source of arousal and increases decision-makers’ willingness to take risks (e.g. Maule et al. 2000). In line with these findings, Ku et al. (2008) showed that the selfreported levels of arousal are higher in high time pressure auctions than without time pressure. In auctions, bidders often have to take quick decisions and respond to auction events within a limited period of time. With respect to time pressure, Ku (2000) denoted: “bidders are highly aroused and unable to think clearly, and since decisions need to be made quickly, bidders keep bidding.” Roth and Ockenfels (2002) showed that in hard close auctions, i.e. auctions with a fixed ending time and date, a large part of bids is placed within the last 5 min. Thus, a modification of the auction system & environment such as setting a time limit influences bidding behavior. While it is unclear which processes exactly cause the above described effect, we propose that hard close auctions induce time pressure towards the end of the auction. This perceived time pressure affects the emotional state (P5), which in turn interacts with the bidding process (P6). In support of this view, Haruvy and Popkowski Leszczyc (2010) found that short auctions lead on average to higher jump bidding, i.e. more aggressive bidding, and eventually to higher prices.

M.T.P. Adam et al.

Particularly with respect to Dutch auctions, time pressure might be induced by high clock speeds. Katok and Kwasnica (2008) showed that fast clock speeds yield lower prices in Dutch auctions than slow clock speeds. In Internet auctions, time pressure is often deliberately induced through the user interface. Salient examples are ticking clocks that show the remaining time in an auction. In the last few seconds of an auction, the platform swoopo.com even displays the time in red and flashes the information: “Just a few seconds to go!” Spotlight effects Spotlight effects relate to the fact that individuals tend to overestimate the attention gained from the audience, believing that “the social spotlight shines more brightly on them than it really does” (Gilovich et al. 2000). The spotlight effect can be further differentiated into audience effects and co-action effects (Zajonc 1965). Audience effects refer to the influence that passive spectators have on human behavior. In the context of auctions, audience effects might be due to spectators watching a charity auction or the media giving attention to spectrum license auctions. In contrast, co-action effects refer to the influence of the presence of other individuals who are engaged in the same activity (Zajonc 1965). In a live auction, for instance, these individuals may be bidders who are bidding on the same item or just observing the current auction and actually waiting for a specific item following up. Spotlight effects seem to be particularly relevant in live auctions as opposed to Internet auctions. Malhotra et al. (2008) attributed this to the higher degree of privacy in Internet auctions and denote that the “spotlight is dimmer” in this environment. Rivalry It should be highlighted that spotlight effects occur without the necessity of strategic interaction. In contrast, the concept of rivalry addresses the fact that a commodity for sale in an auction is rivalrous in the sense that its consumption fully eliminates any utility other individuals may derive from it (Romer 1990). Rivalry is an inherent characteristic of any auction, and the (expected) number of fellow bidders is crucial for the theoretical bidding behavior. However, the perceived level of rivalry can be mediated by the auction design. Ockenfels et al. (2006) argued that the “thrill of competing against other bidders” can cause an excited and competitive state of mind. Heyman et al. (2004) referred to this phenomenon as the “opponent effect.” In support of this theory, there is rich experimental evidence that decision-makers behave differently when playing against humans rather than computerized counterparts (e.g. Engelbrecht-Wiggans and Katok

2007; Bault et al. 2008). Moreover, Häubl and Popkowski Leszczyc (2004) showed that bidding against humans or computers induces different degrees of arousal, which is a proxy for a bidder’s emotional state. They argue that to experience auction fever, it is a necessary condition “that an auction participant competes directly with other human bidders.” In particular, utility interdependencies based on personal rivalries can only develop among human bidders. For instance, Bosman and Riedl (2003) described such dynamics between human decision-makers as “emotional spillover effects between subjects,” which comprise feelings of anger and envy.

Auction fever in the emotional bidding framework In the previous sections, we have established how the auction system & environment, auction events and the auction outcome each can trigger an emotional processing that eventually affects a bidder’s emotional state. Auction fever, eventually, can be interpreted as a change in a bidder’s emotional state, which influences his or her bidding behavior. The existence of this central link between the emotional state and bidding behavior is supported by Sun and Wu (2008), who pronounced that the emotional state directly affects decision-making. The derivation of the emotional bidding framework is, thus, completed by the following proposition: Proposition 6 (P6). A bidder’s current emotional state can influence bidding behavior. Although there exists ample empirical evidence from lab and field experiments–some of which we have presented in this article–in support of P6, we are not aware of any comprehensive test for P6 so far. However, the proposed emotional bidding framework is able to comprehensively conceptualize the many ways in which bidding behavior may be affected by economic as well as psychological factors. The literature review and the emotional bidding framework lead to a definition of auction fever (sometimes also referred to as bidding fever (Malmendier and Szeidl 2008), bidders’ heat (Lee and Malmendier 2007), bidding frenzy (Häubl and Popkowski Leszczyc 2004) or bidding war (Johns and Zaichkowsky 2003)) that unifies the many different notions of this phenomenon in the literature. Definition (Auction Fever). Auction fever is an emotional state elicited in the course of one or more auctions that causes a bidder to deviate from an initially chosen bidding strategy. Previously, “overbidding” was a key element of many definitions of auction fever (e.g. Johns and Zaichkowsky 2003; Ku et al. 2005). This view results from the

A framework for emotional bidding

observation that market participants sometimes place bids in excess of their preset bidding limits. Ariely and Simonson (2003), for example, provided empirical evidence that in fact 82% respondents of an Internet survey set themselves a limit prior to bidding. A second element often found in many definitions of auction fever is the increased emotionality that is experienced by bidders. In the literature, this emotional state is usually characterized by a high level of arousal (Ku et al. 2005), an increased excitement (Lee et al. 2009), or a strong desire to win (or not to lose) (Malhotra et al. 2008). Auction events, along with expected emotions and perceived competition are frequently listed as elicitors of this state. This increased emotionality can thereby “block [bidders’] ability to think clearly” (Murnighan 2002), resulting in an excess of the preselected bidding limit and ultimately higher final prices. Abele et al. (2006) even characterized this process as a “disease,” referring to the literal meaning of the term auction fever. The emotional bidding framework developed in this paper (Fig. 2) enables us to provide a simple and unified definition of auction fever that does not rely on the notion of overbidding with respect to a theoretical reference model: The proposed definition covers not only overbidding in ascending auctions, but also underbidding in Dutch auctions, repeated bidding, and other changes in the preselected bidding strategy along the paths of the emotional bidding framework. While some definitions understand excitement as a sufficient condition for auction fever (Ku et al. 2005), the definition above identifies both excitement and a change in the bidding strategy as necessary conditions. The main advantage of this auction fever definition is that it is derived from the emotional bidding framework. Thereby, the well-known, but poorly understood phenomenon of auction fever can be decomposed into different psychological processes. First, the strategy selection process reflected in the upper part of the framework is not restrictive in terms of how a bidder selects a bidding strategy. For instance, a bidder may be bounded rational, and therefore “insufficiently sophisticated to discern the equilibrium-point strategy” (Vickrey 1961). Merely selecting a disadvantageous bidding strategy, however, is not considered as auction fever by the above definition, but may well result in “overbidding.” Second, the lower part of the framework conceptualizes the dynamic interaction between cognitive reasoning and emotional processing and, thereby, disentangles the multiple facets that influence a bidder’s emotional state.

Conclusions Electronic markets for consumers have recently begun to compete in “emotions,” rather than focusing solely on

simple economics and price wars. As Jennings and Dorina (2003, p. 52) stated: “The new media technologies have a huge capacity to facilitate the creation and distribution of entertainment fare, and their interactivity has potential for stepping up arousal, both in isolation and synergistically. At the same time, the mass character of these media suggests the possibility of social-scale emotion-related phenomena that may be affected by arousal escalation.” Thus in the future, emotionless and unexciting electronic market models will hardly have the potential to draw the attention of (new) customers and may eventually be foreclosed from this highly competitive business segment. In this spirit, Ariely and Simonson (2003) found that 76.8% of the bidders perceive other bidders as “competitors” and refer to auction outcomes as “winning” and “losing.” The terminology of winning and losing is also systematically applied by marketing departments of Internet auction platforms. In 2007, eBay launched an advertisement campaign titled “shop victoriously” stating that “it’s better when you win it” (eBay.com, 2007). This paradigm shift to “entertainment shopping” or “auctainment” (Glänzer and Schäfers 2001) has two important managerial implications. First, it is vital to understand how electronic auctions can trigger emotions and which auction designs are most effective in achieving an exciting auctainment platform. Second, from a managerial perspective, it is even more important how the triggered emotions affect the auction outcome and thus their (online) business. To this end, we have proposed a conceptual framework (i.e. the emotional bidding framework) describing how auction design is linked to bidding behavior through a series of cognitive and psychological processes. This framework, which has been anchored within the economic and psychological literature, is capable of formally structuring the interdependency between the traditional theoretical view on auctions, and the theoretical and empirical evidence that leads to the conclusion that the bidding process is systematically influenced by emotional processes.

Directions for future research Although we have made every effort to underpin the propositions on which we build the emotional bidding framework with findings from previous economic and psychological studies, many open research questions remain. In particular, to the best of our knowledge, there are no studies to date that have systematically investigated the proposed direct relationship between auction events and immediate emotions (P3) or the effect of a bidder’s emotional state on bidding behavior (P6). In order to test these propositions, we especially consider neuro- and physioeconomic approaches as fruitful, which

M.T.P. Adam et al.

apply neurological or physiological measurements in economic laboratory experiments. Such experiments provide more direct correlates between internal emotional processes and external economic bidding behavior. For instance, by measuring phasic skin conductance responses (Dawson et al. 2007), the experimenter can investigate the intensities of single immediate emotions elicited by auction events (P3) and the auction outcome (P1), and whether these intensities vary in different auction formats. With a sophisticated experimental structure and complementary questionnaires, the perceived feelings, e.g. joy or anger, associated with single immediate emotions can be further isolated. By measuring the tonic skin conductance level (Boucsein 1992), it can be observed how a bidder’s emotional state changes through the auction process and how different arousal levels affect bidding behavior (P6). With respect to testing P6, the experimenter can also deviate from the clinical environment of standard economic experiments and exogenously elicit specific emotional states through standardized psychological procedures (e.g. Rottenberg et al. 2007). Another open research question is to what extent immediate emotions induced by the auction outcome (P1) influence future bidding behavior. Such emotions may affect the emotional state in a subsequent auction. According to Rick and Loewenstein (2008) a sufficiently strong immediate emotion can directly influence behavior, precluding cognitive decision-making. In general, research on expected emotions is far more advanced than that on immediate emotions. However, since many important decisions are made “in the heat of the moment” (Rick and Loewenstein 2008) a stronger research focus on intense immediate emotions like frustration of losing would be desirable. Again, neuro- and physiological measures can provide additional insight here.

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