Expectation, Disappointment, and Exit: Evidence on Reference Point Formation from an Online Marketplace

We study expectation-based reference point formation using data from ascending auctions in an online marketplace. Our model formalizes the hypothesis that a disappointment-averse bidder who spends more time in the lead prior to a sudden loss will suffer a higher degree of disappointment. We find that for every additional day in the lead, bidders who lose abruptly are 6 percentage points more likely to exit the marketplace. In contrast, for losing bidders whose expectations are informed by higher competing bids, there is no effect. Also consistent with our model of platform exit, more experienced bidders show less sensitivity to disappointment.