The Lab for Social Decision-Making & Risk

Competition is a fundamental phenomenon in human behavior and a key topic of interest for psychologists and economists alike. Both psychology and economics strive to better understand behavior in competitive environments, but they differ in their research objectives, theoretical perspectives, and empirical methods. Economics typically adopts a normative approach, assuming that agents make rational decisions that balance the tradeoff between the costs of competing and the benefits associated with winning. Economists view competition as a class of incentive structures and investigate the effects of comparative reward schemes on behavior and performance. Psychology adopts a more descriptive approach. Psychologists are interested in the cognitive, affective, and motivational processes that affect decision making. They examine the interpersonal effects of competition and compare them with other social situations. In this chapter, the authors review selected literature on competition in experimental economics and psychology, exploring two common research areas. One is rank-order, effort-based tournaments, by which experimental economists study the effects of various incentive structures on effort and performance, whereas social psychologists examine processes of social comparison. The second is common value auctions and the winner's curse. The authors discuss how research in economics and psychology examine the winner's curse, explanations for the phenomenon, and recommendations to overcome it. Finally, the authors outline possible directions for mutual enrichment for scholars interested in competition. Psychologists can benefit from the precise definitions present in economic experiments, whereas economists can use the insights on the underlying processes of competitive attitudes and behavior offered by research in psychology.