Wednesday, July 16, 2008

More Celebrities Spotted Close to UCLA and Over-Bidding for Art on Cruise Ships and

I was just walking my son to school within .25 miles of UCLA and a tall woman with a friendly dog walked past us. Upon second glance, I convinced myself that it was tennis great Venus Williams . She is taller than I am and appears to be in better shape.

While the Arts Section of the New York Times rarely interests me, this piece is worth reading.

In a nutshell, when wealthy people go on cruise ship vacations they over-bid for art in auctions held on the ship. How would you explain this fact?

1. absence of information --- bidders are unable to easily access google to lookup the market price of a specific piece of art such as a Picasso doodle and without this info the winner's curse kicks in.

2. non-separable preferences --- when you are relaxed on a cruise, you view yourself as a "big spender" who deserves the best things in life. as you let your guard down, you over-bid for junk that you would never bid on if you were on land in the middle of your normal life.

#1 is a weird explanation because if you know that you do not know the value of a commodity that you are bidding on then this should lead you to shave down your bid because you know that ex-post that you will be a "victim" of over-paying (if you win the bidding).

#2 is also weird because you should be aware that a piece of Art is a durable and you will be stuck with it when you get off the cruise. #2 would be a better explanation for consuming a fancy bottle of wine or rare lobster while on the cruise. But again, a perosn with mature preferences should be aware that even if their passions are stirred up while on the cruise that the cruise will end and they will revert to being their "old self" who doesn't want a $50,000 Picaso.

So, my point is that cruise ships offer economists an interesting lab for testing behavioral models. When people are relaxed do they make very different choices? Dan
Ariely suggests that when men are in a state of "arousal" that they make weird choices. I'm saying that this cruise ship is running the opposite experiment.