Brain imaging uncovers why people overbid at auctions

New York University neuroscientists and economists have combined functional MRI with behavioral economic research to discover why people tend to overbid for products sold at auction: fear of losing a social competition. The next step may be explaining irrational Wall Street behavior.

Functional MRI was used to examine brain activation patterns while volunteers played either an auction game with a partner or a lottery game. In both instances, participants could either win or lose money. Winning the auction game, however, depended on outbidding a partner, a key social difference that could be seen in variations of activation in the striatum. Past fMRI studies have linked the striatum with reward-related brain activity.

NYU neuroscientists Elizabeth Phelps, Ph.D., and Mauricio Delgado, Ph.D., now an assistant professor at Rutgers University, worked on the study with NYU economics professor Andrew Schotter, Ph.D., and Erkut Ozbay, Ph.D., a former NYU doctoral student who is now an assistant professor of economics with the University of Maryland.

The study, published in the Sept. 26 issue of the journal Science (2008; 21[5897]:1849-1852), revealed that the primary difference in winning or losing at the auction game compared with playing the lottery game was an exaggerated response to losses in the former. The social competition inherent in an auction produced a more pronounced blood oxygen level-dependent response to losing an auctioned item than to winning the item.

The magnitude of the BOLD effect correlated directly with the amount of overbidding, Delgado said.

A follow-up behavioral economic study confirmed these findings in real life. Participants who were told that they would be rewarded for winning and penalized for losing an auction game consistently bid higher than participants in two other groups. One group was told that winners would be rewarded, and the other was just given experimental dollars and only asked to bid.

Previous economic game studies attributed overbidding behavior to either risk aversion or a so-called joy of winning, according to Schotter. The use of functional imaging led to a different conclusion.

"It was the use of imaging data that allowed us to distinguish between these conflicting explanations and actually arrive at a new and different one: the fear of losing," Delgado said.

For more information from the Diagnostic Imaging archives:
Functional MRI establishes link between brain receptor activation and obesityFunctional MRI snoops out how, why we decide to buyBrain stays cool as jazz man jamsBrain imaging focuses on connectivity and activation
by James Brice