Experimental Investigation of the Impact of Risk Preference on Construction Bid Markups

Abstract

Risk preference plays an important role in decision making. The objective of this article is to show how much risk preferences influence bid-price decision making in bidding for construction contracts. Based on the literature review and interviews, the authors designed a bidding situation and conducted an experiment to test decision- maker responses. In total, 172 participants with lengthy experience in bidding for construction work took part in the experiment. Both descriptive statistics and regression analysis were used for deep information mining of the data. Risk preference was found to have a significantly positive effect on bid markups. Based on a comparison of the influences of risk preferences on the bid price in different competitive bidding situations, the results show that the bid price decreased with the number of bidders, and it was even lower when the number of bidders was unknown. Therefore, considering both risk preference and the number of bidders is important in reasonable decision making. Finally, advice is also provided to construction companies for evaluating the leader’s decisions and the decision-making team.