Bidding%20Strategies%20at%20Residential%20House%20Auctions

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Bidding Strategies at Residential House Auctions

• Clare Branigan, Paul Ryan
• University College Dublin

2
Introduction

• This paper examines bidding strategies at
  auctions for residential property market sales in
  Dublin.
• The period under examination was September 2004
  to December 2005 which was close to the peak of
  the property boom in Ireland
• At that time, sales of properties through the
  auction mechanism was more common for premium
  properties

3
Examples

• In 2005, houses on Shrewsbury Road were among the
  most expensive in Europe after 12 years of almost
  uninterrupted nationwide rises.
• For example, in 2005, a 4,000 sq ft (372 sq m)
  house on Shrewsbury Road (Dublin 4) set an Irish
  record when a buyer paid more than 58m for a
  home with extensive land to the rear that remains
  undeveloped.
• Despite having a guide price of 35 million, the
  house eventually reached 58 million due to a
  rumoured six potential buyers vying to purchase
  the property.
•  In September 2011 the house went on the market
  again for a price of 15 million, down 43
  million from its sale value in 2005, but was
  withdrawn presumably because it never met the
  guide price

4
Example Walford Shrewsbury Road
5

6
Bidding Strategies and Open English Auctions

• Optimal Bidding strategies for sellers and
  bidders depend on the auctions rules
• Open English auctions are a popular form of sale
  mechanism in Ireland, particularly at the premium
  end of the market.
• Open English Auction
• The auctioneer calls the bid, and the willing
  bidder indicates his assent by some slight
  gesture
• The auctioneer raises the price incrementally or
  a bidder can offer a higher bid
• Eventually only one bidder is left who wins the
  auction

7
Bidding Strategies

• Actual bids can signal that an items true value
  has not been reached (Kagel, 1995) and increased
  bids by others can cause other to copy.
• Bidders use traffic as an indication of value,
  and more traffic implies higher value.
• This is consistent to Shillers (1990) theory on
  a shortage illusion.

8
Escalation of Commitment

• With escalation of commitment, a person allocates
  a resource search costs, finance or intangibles
  (e.g., perception, self-identify) to further a
  goal.
• When the result is not achieved, they are
  disappointed, and therefore more committed to
  achieving the goal at the next opportunity.

9
Escalation of Commitment

• A Dublin property auction requires the successful
  bidder to pay a ten per cent deposit for the
  property immediately after the auction, which is
  non-refundable.
• Thus, a potential bidder is likely to have spent
  funds on a property survey and a title check
  prior to the auction.
• When the guide price is low, many bidders will
  have sunk costs before the auction, and will be
  committed to winning.

10
Endowment Effect

• Lower guide prices encourage more bidders to have
  sunk costs in terms of property surveys and legal
  checks
• This encourages participation in the auction
  which results in the endowment effect
• All of which results in higher sales prices

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Sunk Cost Effect

• The sunk-cost effect is an escalation of
  commitment has been defined as the greater
  tendency to continue an endeavor once an
  investment in money, time or effect has been
  made,(Arkes, Blumer,1985).

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Sunk Cost Effect

• Although economic rationality states that sunk
  costs should be ignored and decisions be made on
  the basis of future benefits and costs,
  individuals tend to be retrospectively rational,
  justifying prior decisions (Shaw, 1981).

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Types of Bidders

• Neophytes get in early and fade away
• Sniper the guy who sits in the back row and
  jumps in at the end when all bidding is finished
• Jump Bidding Jump Bids in high increments to
  discourage competition
• Flamboyant Bidders Those who attract the
  auctioneers attention by calling bids loudly or
  waving a paddle
• Shina and Greenleaf (2000)

14
Bidder Aggressiveness

• Shina and Greenleaf (2000) results indicate that
  bidders at Open English Auctions need to be
  concerned about the aggressiveness of other
  bidders

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Sniper

• A sniper is defined to be a late bidder at the
  auction who does not bid until only one
  remaining bidder is left.
• Popular in online auctions e.g., there is an
  active exchange in eBays chat rooms about how to
  snipe effectively even bidding software that
  will bid for you at the last minute

16

• A sniper strategy can serve the purpose of
  signalling an aggressive strategy, sending the
  message Dont continue bidding as I am going to
  keep bidding higher.
• This message discourages competition for two
  related reasons
• it suggests that the sniper bidder values the
  property more than anyone else, and
• if the aggressive bidder drops out at any
  stage it implies that you have overbid for the
  item.

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• When a sniper influences competitors to drop out
  quickly, he wins the auction at a relatively low
  price does not have to carry out the threat of
  bidding to a high level
• This reason suggests that auctioneers should
  maintain strict control of the bidding sequence
  in order to promote competition (Avery, 1997)

18
Data Gathered

• Data for all available auctions in Dublin area
  was collected between Sept 2004 and Nov 2005.

19
Summary 1565 Auctions
20
Methodology

• Observed over 200 auctions in this time period
• 105 were sold at auction, by an average of 44
  over the guide price

21

• Proposition The more bids a person makes, the
  more committed he becomes to winning the auction.

22
Bid Progression

23

• For each auction, the number of bids for each
  bidder was counted, and the winning bidder was
  highlighted
• In 68 of the cases, the person who made the most
  bids was the auction winner, i.e., the bidder
  that is most committed to winning, places the
  most bids.

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• This agrees with the theory that actual bids can
  signal that an items true value has not been
  reached (Kagel, 1995) and increased bids by
  others can cause other to copy (herding affect).
• Bidders use traffic as an indication of value,
  and high traffic implies greater value.
• Traffic influences the estimated value of an
  item, i.e., traffic often begets more traffic and
  infers value (Shiller, 1990 Simonsohn Ariely,
  2005).

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Best Bidding Strategy The Sniper
  Winner 1st Bidder Winner 2nd Bidder Other Bidder Winner Sniper
No. of Auctions 18 14 12 22
Winner 27 21 18 39
Over Guide 42 47 57 36
26
Samples

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27 Belmont Ave, Donnybrook
Apr 05 Guide 700,000
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27 Belmont Ave, Donnybrook
Apr 05 Guide 700,000 Sold 1.36 m, 4 bidders
94 over guide price
29
8 Temple Cresent, Blackrock
May 05 Guide 650,000
30
8 Temple Cresent, Blackrock
May 05 Guide 650,000 Sold, 1.3 m, 5 bidders 100
over guide
31
Samples Priory Grove, Blackrock
March 05, 730,000
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Priory Grove, Blackrock

April 06 ?
33
Priory Grove, Blackrock

April 06 ?
Initial 730,000 15
109,000 Upgrades 90,000 Total 929,000
34
Priory Grove, Blackrock

April 06 1.8m
35
References

• Arkes, H., Blumer, C. (1985). "The Psychology of
  Sunk Costs." Organizational Behaviour and Human
  Decision Process 35 124-140.
• Avery (1997), Strategic Jump Bidding in English
  Auctions, Review of Economic Studies 65, 185-210
• Bazerman, M., Sameulson, W. (1983). "I Won the
  Auction but Don't Want the Prize." The Journal of
  Conflict Resolution 27(4) 618-634.
• Diaz III, G. P., Levy, D. (2002). "Residential
  valuation behaviour in the United States, the
  United Kingdom, and New Zealand." Journal of
  Property Research 19(4) 313-326.
• Diaz III, H., A. (2001). "Behavioural Research
  into Real Estate Valuation Process Progress
  Toward a Descriptive Model." Research Issues in
  Real Estate 8 3-30.
• Diaz III, J., Hansz, A. (1997). "How valuers use
  the value opinions of others." Journal of
  Property Valuation Investment 15(3) 256-260.
• Filiz-Ozbay, E., and Ozbay, Erkut (2007).
  "Auctions with Anticipated Regret." American
  Economic Review 97(4).
• Galinsky, A., Mussweiler, T. (2001). "First
  offers as anchors The role of perspective-taking
  and negotiator focus." Journal of Personality and
  Social Psychology 81 657-669.
• Kagel, J. H., Levin, D (1986). "The winner's
  curse and public information in common value
  auctions." American Economic Review 76 894-920.
• Kagel, J. (1995). Auctions A survey of
  experimental research in J.H. Kagel A. E. Roth
  (Eds.), The handbook of experimental economics
  (pp.501-585). Princeton, NJPrinceton University
  Press

36
References

• Kahneman, D., Slovic, P., Tversky, A. (1982).
  Judgement under Uncertainty Heuristics and
  Biases. Cambridge, Cambridge University Press.
•  
• Ku, G., Galinsky Adam, Murnigham Keith (2006).
  "Starting Low but Ending High A Reversal of the
  Anchoring Effect in Auctions." Journal of
  Personality and Social Psychology 90(6) 975-986.
• Mackmin, D. (1994). The Valuation and Sale of
  Residential Property. London, Routledge.
• McAfee, R., and McMillan, J. (1987). "Auctions
  and Bidding." Journal of Economic Literature
  XXV(June 1987).
• McGreal, S., Adair, A., McBurney, D. Patterson,
  D. (1998). "Neural networks the prediction of
  residential values." Journal of Property
  Valuation Investment 1196(14) 1.
• Nofsinger, J. (2005). The Psychology of
  Investing. Upper Saddle River, New Jersey,
  Prentice Hall.
• Northcraft, G. B., Neale M. A. (1987). "Experts,
  amateurs and real estate An anchoring-and-adjustm
  ent perspective on property pricing decisions."
  Organizational Behaviour and Human Decision
  Process 39.
• Ozbay, Emel, Ozbay, Erkut (2007). Auctions with
  Anticipated Regret Theory and Experiment. The
  American Economic Review, Vol. 97
• Schick, F. (1992). "Allowing for Understandings."
  The Journal of Philosophy 89(1) 30-41.
• Sinha A., Greenleaf, E, (2000)The Impact of
  discrete Bidding and Bidder Aggressiveness on
  Sellers Strategies on Open English Auctions
  reserves and Covert Shilling, Marketing Science,
  Vol 19, No. 3 Summer 2000. 

37
References

• Arkes, H., Blumer, C. (1985). "The Psychology of
  Sunk Costs." Organizational Behaviour and Human
  Decision Process 35 124-140.
• Avery (1997), Strategic Jump Bidding in English
  Autions, Review of Economic Studies 65, 185-210
• Bazerman, M., Sameulson, W. (1983). "I Won the
  Auction but Don't Want the Prize." The Journal of
  Conflict Resolution 27(4) 618-634.
• Diaz III, G. P., Levy, D. (2002). "Residential
  valuation behaviour in the United States, the
  United Kingdom, and New Zealand." Journal of
  Property Research 19(4) 313-326.
• Diaz III, H., A. (2001). "Behavioural Research
  into Real Estate Valuation Process Progress
  Toward a Descriptive Model." Research Issues in
  Real Estate 8 3-30.
• Diaz III, J., Hansz, A. (1997). "How valuers use
  the value opinions of others." Journal of
  Property Valuation Investment 15(3) 256-260.
• Filiz-Ozbay, E., and Ozbay, Erkut (2007).
  "Auctions with Anticipated Regret." American
  Economic Review 97(4).
• Galinsky, A., Mussweiler, T. (2001). "First
  offers as anchors The role of perspective-taking
  and negotiator focus." Journal of Personality and
  Social Psychology 81 657-669.
• Kagel, J. H., Levin, D (1986). "The winner's
  curse and public information in common value
  auctions." American Economic Review 76 894-920.
• Kagel, J. (1995). Auctions A survey of
  experimental research in J.H. Kagel A. E. Roth
  (Eds.), The handbook of experimental economics
  (pp.501-585). Princeton, NJPrinceton University
  Press
• Sinha A., Greenleaf, E, (2000)The Impact of
  discrete Bidding and Bidder Aggressiveness on
  Sellers Strategies on Open English Auctions
  reserves and Covert Shilling, Marketing Science,
  Vol 19, No. 3 Summer 2000.