[General Battuta]

We are all a little bit stupid. Humans are, fundamentally, not wired to make rational decisions. This is part of the reason capitalism consistently fails to be as excellent as theory suggests it should be.

Today I saw a great game to demonstrate this fact. Here are the rules.

I am going to put a $20 bill up for auction.

The bidding starts at $1. You may top the previous bid by $1, no more, no less. You may not top your own bid. (The first bid will thus always be $1, the second $2, and so on. You can't raise your own bid; you must wait for someone else to top it, and then top them in turn.)

When the auction concludes, the winning bidder must pay the amount they bid for the $20 bill. Additionally, the second-highest bidder must pay the full amount of their bid, but they receive no compensation of any form.

No communication of any kind is permitted except for the bids themselves.

I watched this exercise performed by dozens of students at one of the top universities in the US. I also saw data on the outcome of this exercise with economics professors, Goldman-Sachs analysts, executives at other major financial firms, and young entrepreneurs.

What do you think happened? How much do you think the bill went for?

[Shivan Hunter]

well, obviously > $20.

$40? Tell me more or less and I can do a sort-of-binary-search for it.

[Herra Tohtori]

Clever. No one wants to be the second, so the bidding goes on and on because if someone outbids you, their loss is N-20 dollars while you as second bidder lose N-1 dollars (N being the final bid).

I'm guessing two people ended up in a bidding match well beyond the 20 buck range... with my supercalibrated stetson-harrison method I estimate a sum of 143 dollars as final bid.

[Ghostavo]

The winner is the one that doesn't bid at all.

I'd guess the bid went extremely high, a couple of million dollars.

I remember reading a study about something similar to this. When people invest effort (money, time, etc.) in something, they are more likely to continue investing effort in that very same thing, even if logically it would be best to cut your losses and start with something else.

[Turambar]

I'd never go above $19

[Herra Tohtori]

Well, a rational approach to this would be to make a deal with everyone present that one person will make the starting bid, no one else will bid at all, and the bid as well as the 20 dollar bill would be divided amongst the party.

With twenty people present, everyone would benefit 95 cents, so it would be just as sensible to simply let someone make the starting bid, and let him benefit 19 dollars.

Of course, in contests like this "winning" is not the same as "profit".


Or, in other words: If the people in the "auction" would consider them as one participant in the contest and the auction keeper(s) as the other party, they would see that the only way for them to win and the auction keeper to lose is if the total bid stays below or at maximum of ten dollars in the case of 20 dollar bill.

Instead, they fall into the pit hole of thinking each other as their "enemies" and try to win at that contest instead of seeing the obvious - the only one who will benefit when the bid goes past certain mark is the one who is auctioning the 20 dollar bill.


Turambar also falls into this sort of thinking. If you switch your paradigma from "me versus others" (me vs other bidders) to "us versus them" (bidders vs auction keepers), the contest gains a whole new meaning.

In ideal case, no one rises the bid after the opening bid. In no case is it beneficial for the bidders as a whole to raise the bid over half of the prize money (with these rules). At any time when bid goes past half the prize, the auction keepers are getting profit.


This, of course, is limited to purely monetary definition of profit. There are other ways one could benefit from winning a contest.

"Look at me! I have so much money I can bid this much for essentially worthless victory over these other guys around here!"


Yep, I can see how in high society that could be beneficial signal to send out - and the actual monetary losses can still be negligible to the people I'm thinking of.

[General Battuta]

*a plan*

I think you forgot one rule:

No communication of any kind is permitted except for the bids themselves.

[Turambar]

That involves people working together.  People are dicks.  I think that's the point.

[Herra Tohtori]

Well, yeah. That.

In that case it would be better to just let the one fast enough to place the starting bid to enjoy the fruits of his or her speedy reaction.

But, this only applies if all the bidders were thinking rationally...


Just out of interest, what counts as communication?

[Turambar]

I'm not really sure how to suggest "just one guy bid" using only suggestive eyebrow waggles and winks.

[General Battuta]

There's another excellent game that illustrates this point.

You are going to play a game for ten seconds. You will be partnered with someone else.

From this moment on, you cannot speak or communicate, and you must close your eyes and keep them shut. Please assume the arm wrestling position!

Now, you're going to arm wrestle, and every time your opponent's hand touches the desk, you will receive $1. You have 10 seconds. Go.

I imagine you can tell what the optimal strategy in this game is, and I also imagine you can guess what pretty much everybody actually does.

[IceFire]

Well, yeah. That.

In that case it would be better to just let the one fast enough to place the starting bid to enjoy the fruits of his or her speedy reaction.

But, this only applies if all the bidders were thinking rationally...


Just out of interest, what counts as communication?

We're only rational in spurts... as soon as something like a competition comes along we're pre-wired to compete.  Determining the order of who is "best" or the leader or whatever. Except money isn't really something that works well with those basic instincts... so instead there are a dozen stupid people.

[Herra Tohtori]

I'm not really sure how to suggest "just one guy bid" using only suggestive eyebrow waggles and winks.

Say no more, say no more, know what you mean, nudge nudge, wink wink.

You are going to play a game for ten seconds. You will be partnered with someone else.

From this moment on, you cannot speak or communicate, and you must close your eyes and keep them shut. Please assume the arm wrestling position!

Now, you're going to arm wrestle, and every time your opponent's hand touches the desk, you will receive $1. You have 10 seconds. Go.

I imagine you can tell what the optimal strategy in this game is, and I also imagine you can guess what pretty much everybody actually does.

Please explain this further. If it means what I think it means, both players would gain most monetary profit by basically moving their hands from one side to another as fast as possible...


Oh, here's another popular game.

If you ever get married, and you're asked the question "do you..." etc, you'll win a box of beer for every second you let pass before you answer.

For optimal strategy, linear optimization is required, taking into account your fondness of beer, and the bride's sense of humour.

[Bobboau]

I'm going to guess $26 was the high bid, at that point the whole 'try to reduce my losses' aspect would start breaking down

[Qent]

You're not allowed to waggle eyebrows or wink. The only communication possible is Morse code via bids (very expensive).

Oh I got one... six people stand around a table. On the table are six pieces of candy (or dollar bills, but the professor wasn't about to hand out money for a game). They (the people) can say WHATEVER THEY WANT, and each person can take as much as he wants whenever he wants. If no one touches it for a whole minute, then the referee doubles the amount. It can only get doubled once.

None of these demonstrate human irrationality. In fact, they demonstrate rationality. At every point, each participant makes the decision most likely to benefit him the most, given incomplete information about the others' intentions. The real point is that being rational in these situations makes everyone lose.

[General Battuta]

I'm going to guess $26 was the high bid, at that point the whole 'try to reduce my losses' aspect would start breaking down

In this group the high bid was about $120.

In the rich executives group it was well over $2000.

[Titan]

OK, I have another game. 12 random people walk into a room. A vending machine in the middle of the room only has one piece of candy in it. They look and see that there is 5 cents short of correct change in the machine. Nobody has any currency on them. Then, one person exclaims, "Is that a nickle on the floor?"
Just then, everybodies stomach starts growling.
...

[Solatar]

I'd never go above $19

But if someone bids $20, you've lost $19 (since you're in second place).  If you then one up them to $21, you only lose $1.

[Droid803]

It's $20.
I wouldn't bid at all.

The only way to win is if everyone works together.
Obviously you cannot trust anyone to work together.
So don't even play.

It's not about money. It's about the moral victory.

[el_magnifico]

I'd never go above $16. If someone is stupid enough to say $17, someone is probably going to be stupid enough to say $18. I seriously doubt anyone I hang around with will offer any amount >= $19. But who knows...

However, since I'm so distrustful of easy money, I'd probably just avoid bidding altogether if I'm given the option.