How do you cope with uncertainty and risk in dynamic auctions?

2 Valuation models

The second thing to consider is how you value the items that you are bidding for, which affects your willingness to pay and your expected utility. There are two basic valuation models: private and common. In private valuation, each bidder has a different and independent value for each item, which is known only to him or her. In common valuation, the items have a common and uncertain value for all bidders, which is revealed after the auction. Depending on the valuation model, you may face different types of uncertainty and risk, such as winner's curse, exposure problem, or signaling effect.

3 Information structures

The third thing to consider is the information structure of the auction, which determines what you know and what you can learn about the items, the other bidders, and the market. There are three main types of information structures: complete, incomplete, and asymmetric. In complete information, all bidders have the same and perfect information about everything. In incomplete information, some information is unknown or uncertain to all bidders. In asymmetric information, some bidders have more or better information than others. Depending on the information structure, you may face different strategic incentives and challenges, such as signaling, screening, or collusion.

4 Bidding strategies

The fourth thing to consider is how you choose your bidding strategy, which is a function that maps your information and preferences to your actions. There are many possible bidding strategies, but we will focus on two main categories: truthful and strategic. In truthful bidding, you bid according to your true valuation of the items, regardless of the other bidders' actions. In strategic bidding, you bid according to your beliefs and expectations of the other bidders' actions, trying to maximize your utility or minimize your regret. Each strategy has its pros and cons, depending on the auction format, the valuation model, and the information structure.

5 Risk attitudes

The fifth thing to consider is how you cope with risk, which is the variability of the outcomes and their consequences. There are three main types of risk attitudes: risk-averse, risk-neutral, and risk-loving. In risk-averse bidding, you prefer a certain outcome over an uncertain one with the same expected value, and you are willing to pay a premium to avoid risk. In risk-neutral bidding, you are indifferent between a certain outcome and an uncertain one with the same expected value, and you only care about maximizing your expected utility. In risk-loving bidding, you prefer an uncertain outcome over a certain one with the same expected value, and you are willing to pay a premium to take risk. Depending on your risk attitude, you may have different bidding behaviors and outcomes, such as overbidding, underbidding, or shading.