Reference dependence, expectations and anchoring in the Becker-DeGroot-Marschak mechanism

We explore several behavioral issues associated with bidding behavior in the Becker-DeGroot-Marschak (BDM) mechanism; a popular mechanism in experimental economics and valuation research. By manipulating the random binding price and framing, we find that bids are affected by the choices made by experimenters. Our theoretical framework, shows that the treatment effects are consistent with an attachment to expectations-based reference points, anchoring on the highest price, as well as the no-loss-in-buying hypothesis of Novemsky and Kahneman (2005). Overall, our theory and experimental results confirm that the mechanism is not incentive compatible and thus previous results regarding product valuations, as well as various treatment effects identified using the mechanism, should be interpreted as conditional on the particular choice of design variables.