Behavioral biases of dealers in US Treasury auctions

This paper provides evidence of behavioral biases and bounded rationality by large dealers in U. S. Treasury auctions. I argue that these dealers use a heuristic of yieldspace bidding which leads to biases manifested in three ways: the submission of dominated bids those that could be improved without raising the bidding price; bidding in a manner that disregards the unevenly spaced grid; and rounding of bids in yield space. Consistent with bounded rationality, I show that bidders are less susceptible to this bias when the cost of suboptimal bidding is high. While the literature provides substantial evidence of behavioral biases among individual investors, it is less well documented for large sophisticated institutions that are likely to be important for setting of asset prices. These primary bond dealers who regularly bid for billions of dollars in Treasury bill auctions are precisely such economic agents