Research on the “foreign language effect” suggests that using a non-native language can change how individuals process information and make decisions. For example, people making moral judgments in a foreign language are more likely to approve utilitarian choices, such as pushing one person off a bridge to save five others, that they would reject when thinking in their native tongue. Similarly, people show reduced emotional responses when making judgments about risk and benefit in a foreign language, leading to more deliberative decision-making. These effects occur because foreign language use reduces reliance on quick, intuitive, emotionally driven judgments and promotes more deliberative thinking. In this paper, the authors test whether such language effects extend to financial decision-making in market settings.
The authors examine this question in the context of blind bidding auctions. They conduct a laboratory experiment in Beijing, China, with 357 native Mandarin Chinese speakers who know English as a foreign language. Participants bid in ten rounds of auctions with the goal of winning jars filled with a random mix of high-value coins (1 RMB, worth about 15 cents) and low-value coins (0.1 RMB), while avoiding paying more than the value of the jar, or suffering the “winner’s curse”. Before each auction, each participant views a different sample of ten coins drawn from the jar to help estimate its total value. Participants are randomly assigned to complete the entire experiment in either Mandarin or English and in groups of 6 or 12 participants.
The authors measure how closely participants’ bids match either a “naïve” strategy (bidding the expected value based on their sample of coins) or a theoretically optimal strategy that accounts for the risk of overbidding. They explore the role of language in influencing participants’ bidding decisions, as well as the role of the number of bidders in an auction and response to feedback across auction rounds. The authors find the following:
- Bidders using a foreign language initially make more strategic decisions and are less susceptible to the winner’s curse. In the first auction, 95% of native language bidders bid more than the value of the jar, compared to only 68% of foreign language bidders. Native language bidders bid significantly above the optimal level by an average of 16.05 RMB, while foreign language bidders did not deviate from the optimal bid.
- The foreign language effect disappeared across consecutive auctions as participants received feedback about others’ bidding behavior. By the second through tenth auctions, bidders in both language treatments adopted similarly poor naïve bidding strategies, with winner’s curse rates converging to around 85% in both groups.
- Feedback about previous winners’ overbidding drove the convergence to poor decision-making. When auction winners overbid relative to the jar’s actual value, other participants increased their own “cursedness” levels in subsequent auctions more than when winners did not overbid. This created a cycle where observing overbidding led to more overbidding.
- Decision making speed reflected the quality of choices across language treatments. Foreign language bidders took significantly longer to place bids in the first auction when they were making strategic decisions, but bidding speed converged between treatments as both groups adopted faster, more intuitive naïve strategies in later auctions.
- Group size effects were eliminated by foreign language use. Native language bidders in larger groups (12 participants) overbid significantly more than those in smaller groups (6 participants), replicating prior findings. However, foreign language bidders showed no difference in overbidding between large and small groups, suggesting the foreign language dampened competitive pressures.
These results have important implications for financial decision-making not only in auctions but more broadly in increasingly globalized market settings where participants frequently operate in non-native languages, suggesting both potential benefits and limitations of foreign language use in financial contexts. This interdisciplinary research was a joint effort of researchers from Economics and Psychology and was funded by NSF.