We show that common market settings tend to amplify rather than reduce the effect
of behavioral biases on prices and other market outcomes. We study two common market
mechanisms, auctions and fixed-price markets, and establish three results. First,
agents with upward-biased valuations have an amplified effect on market outcomes because
markets over-select them relative to their population share. Intuitively, markets
"fish for fools." Second, auctions are often more efficient at "fishing" than fixed-price
markets because a larger share of biased agents is required for prices to move in
the fixed-price setting. Third, sellers respond to this difference and choose the
less efficient but more profitable selling mechanism. They may also engage in inefficient
complementary actions such as overproducing the good and over-recruiting buyers. We
provide evidence from several markets, including eBay, housing markets, and financial
markets. (C) 2020 The Authors. Published by Elsevier Inc.
