Choosing Between Now and Later

People Are Inconsistent

…

  • Mean offer: 50.64

  • Over 50% of participants make offers in the range between $50 and $75.

  • Intuition: the expected value of Company T is $50, meaning this is worth $75 to me (Company A). So, it should be profitable to suggest a bid between $50 and $75.

Suppose you bid $60. The firm will reject your bid if it’s worth more than that, so it must be that it’s worth at most $60. Since, by assumption, all possible values are equally likely, Company T is worth $30 on average (and $45 to you). Hence, if you bid $60, your expected loss is $15.

Make this calculation for some other values. What conclusion do you reach?

…For any positive bid, the outcome is an expected loss equal to 25% of the bid!

But 89.58% of participants make positive offers!