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Willingness To Pay (WTP) / Willingness To Accept (WTA)

Willingness to accept (WTA) and willingness to pay (WTP) are measures used in economics to assess people’s preferences without relying on their actual choices between options. WTA is the minimum amount of financial compensation that someone would require to part with a good or endure something undesirable, such as pollution or crime. On the other hand, WTP is the maximum amount of money a person is willing to pay for a good or to avoid something undesirable. According to traditional economic theory, WTP should be consistent across decision contexts, and WTA should be close to WTP for a given good. However, behavioral economics has shown that WTP and WTA may vary depending on the context. For example, people may be willing to pay more for a beer purchased at a resort hotel than a rundown grocery store, depending on the scenario presented to them. Additionally, research has found that the average WTA for a good may exceed its WTP, indicating an endowment effect, where people value something more if they already own it. The WTA-to-WTP ratio is typically higher for goods that are not ordinary private market goods, such as health and safety, and public or non-market goods.

Winner’s Curse 

The winner’s curse is a phenomenon in which the winning bid in an auction exceeds the true value of the commodity being auctioned. This is often due to emotional and cognitive biases as well as incomplete information. Richard Thaler’s seminal paper on the topic revealed that even if bidders are risk averse, the winning bid will still exceed the value of the item. This deviation from rationality is an example of bounded rationality, which arises when people struggle with contingent reasoning on future events. The degree of uncertainty about the commodity’s value and the number of competing bidders are two factors that influence the incidence and magnitude of the winner’s curse. In an attempt to overcome this phenomenon, reducing the variance in feedback and increasing the correlation between choices and outcomes can significantly improve performance.