A new study shows that emotions often affect economic decisions, leading bidders in an auction to be influenced by “irrational motives.”
For the study, researchers from the Karlsruhe Institute of Technology in Germany recruited more than 90 people, then simulated a so-called “Dutch auction,” usually used for selling flowers. In this scenario, an item is initially offered at a very high price, then the price is lowered in increments until a bidder accepts the price.
“The Dutch auction is clearly structured and dynamic at the same time. It represents an excellent research scenario,” said Marc Adam, Ph.D., of the Karlsruhe Institute of Technology.
Adam, along with his colleagues, Jan Krämer and Christof Weinhardt, found that rapidly falling bids lead to a lower price and to a higher excitement level in the bidders.
Excitement is reflected by the heart rates and skin resistances of the participants, said Adam, who noted “our experimental setup closes the gap in observation.”
Previously the brain areas responsible for emotions were examined using magnetic resonance tomographs while the subjects bid against an electronic counterpart. In other studies, participants were asked to report their subjective feelings after the auction.
Thanks to modern measurement technology, it is now possible to measure the physiological data of many people during an auction, the researchers noted. “Measurements in a multi-person situation significantly increase accuracy and are much closer to reality,” Weinhardt said.
The pulse frequencies and measured skin resistances allow accurate conclusions to be drawn with respect to the level of excitement, according to the researchers.
The researchers found that bidders, after reaching a certain excitement level, will try to “further enhance their thrill by delaying their bid,” according to Adam.
Based on heart frequency and skin conductance, it was also found that winning an auction yields a weaker physiological reaction than going away empty-handed. “In other words: Losing is worse than the good feelings associated with winning,” he said.
The researchers say their results can be applied to other types of auctions, such as classic auctions, where excitement may lead to paying higher prices, or Internet auctions that not only help bidders attain a certain product, but also offer entertainment.
“Internet auction platforms are highly skilled in enhancing the thrill, entertainment, and excitement by the course of the auction and advertisements,” said Adam. “In the academic world, by contrast, economic models were based for a very long time on the purely rational human being, the homo oeconomicus. Our study reveals that emotions also play an important role.”
The current study was based on a series of auctions among six test subjects. A new experimental laboratory for the interaction of up to 40 participants and simultaneous high-resolution measurement of heart rate, skin resistance, and other physiological parameters will soon be established with funding from the German Research Council.
“Then, it will be possible to study larger and more complex scenarios in more detail,” Adam said. “Maybe we will soon be able to study the emotional side of financial markets and other decision-finding processes with many market participants.”
The study was published the International Journal of Electronic Commerce.