Depending on the class size, you might as well make some kind of deal. I bid one dollar, and no-one else does, and in return I give everyone a fraction of it.
If someone then decides to go for the whole thing and outbids you, eh, i’m out a buck and he’s the class asshole. Money well spent to identify.
Yeah, what **Revenant Threshold ** said. With cooperation, this is completely exploitable. Split is, give it to charity, randomly give it to one person, whatever.
But it is a class of MBA’s, so maybe cooperation would be impossible.
In case anyone wants to google this, the professor’s name is Bazerman
Risk aversion is very much a part of classical economics – unless by classical you’re going back to Irving Fisher and the like. And even then Bernoulli had discussed it long before though he was more of a mathematician.
Even loss aversion (though not by that name) much predates the current behavioral revolution. Friedman and Savage postulated an S-shaped utility function back in 1948. (“Utility Analysis of Choices Involving Risk”, 1948, Journal of Political Economy Vol. 56, No. 4 (Aug., 1948), pp. 279-304
I would never bid more than $10, unless I were using Rysto’s trick of opening the bidding at $19. My thinking is that it’s a zero-sum game, so for me to win, the professor has to lose. If I bid more than $10, then the professor wins. And if the professor wins, then I certainly don’t.
This is so easy. Just bid zero.
To clarify, if I am bidder #1 I will bid $1. If I am bidder #2, if bidder #1 bids anything, I will bid 0, and “lose” the bid. Ratcheting up the bidding is an obvious losing proposition. Hopefully the “winning” bidder will cooperate with me in “future” games, if they exist.
The “irrationality” this auction exploits is that people are so unfamiliar with paying on the second-highest bid that they fail to weight it properly in their strategy. Given the sting of paying on a second-highest bid, no bid (not even a first bid) is particularly rational, although very low bids are low-risk and close to zero in expected payoff.
What I really wonder about… He’s been doing this every year, and it’s well-enough known that it gets discussed across the Internet. Surely, his students would eventually catch on that he’s going to do this, and come to understand the strategy.
As, trivially, is an initial bid of $19.01 if everyone plays rationally and maximizes expected payoff since no one would every rationally make a first bid above $20. They know then that whatever the result, they will end up with a negative net payoff so would be better not bidding at all.
After checking various online descriptions it seems the rules are that bids start at exactly $1 and must be in exactly $1 increments. In that case, completely rational bidding would lead all bidders to realize that whenever two or more players have bid, the bidding war will ensue leading inevitably to a loss to both of them, so the rational equilibrium is for one lucky bidder to be recognized first and bid $1 with all other bidders abstaining from bidding.
Assuming this were allowed, the penny isn’t necessary. If the starting bid is 19.00, then a counter-bid of 20.00 has at best no benefit, and can have a drawback, so it’s still not rational.
Note that in Bazerman’s study, “The rule of silence was in effect. Bidders were not allowed to kibitz.” (MFinley.com is for sale | HugeDomains). Collusion, short of blinking morse, is ruled out. With that in mind, it seems to me there are three interpretations of rationality in this game.
The “individual rationality” has been expounded on; don’t bid above $20. This would apply if a person is looking solely at their interests.
The second interpretation would be a total “value (or community) rationality”. After the bid goes above $10, a transaction is taking place that is in the benefit of the $20 holder. Even if it is good for the individual winning the $20, it is still poor value for the community of contestants.
The third interpretation would be to approach it as logical gambling. A person must decide what $20 is worth, and how much they are willing to wager to get it. Further variables may adjust the wager limit as a result of the perceived probability that the opponent(s) will act irrationally [opponent(s’) demographic, tells, atmosphere, relationship, etc].
Warning: Talking out of ass.
As a sidenote, the experiments done by Bazerman give unscientific results. There are bragging rights to having competed in his auctions (especially for victors). A person is paying not just for a $20 bill; they are also purchasing story. This is especially true depending on a person’s wealth and profession.
Really? You’d brag about having paid over $200 for a twenty-dollar bill?
No. Personally, I would abstain from bidding. It is too high variance. If I did play, I would go up to $10.
Other people? Well, I can’t speak for them or their irrationality. I do not know if they are doing this specifically for having a story to tell… but I do know that participating in a great research study like this with a renowned academic is an experience people will pay for. A person might feel like they were buying a footnote in history, so to speak.
There would have to be numerous parameters set to make this auction a gold standard study. Can the participants see the auctioneer? Can they see each other? Is it done through writing? Are there fixed time intervals between bids? Do the participants know they are part of a study or is it candid? What is their disposable income? None of these factors are addressed and contestants aren’t random.
I, for one, sitting in a Harvard classroom with Bazerman and my peers, would be inclined to bid up to $10. Damn straight I’d tell the story as an ice breaker for business lunches. Sitting in a community college classroom, I would be more inclined to figure out how many bagels I could afford that week instead of participating.