Thought Problem. Conclusion. Auction time!!!

[Supertramp78]

Here is the set up for our little experiment. I am going to auction off a $100 dollar bill. Regular, recent mint, real $100 dollar bill. You folks are going to bid on it. Whoever wins the auction, get's the $100 bill.

Here's the catch.

Whoever comes in second has to pay too.

Whoever has the higest bid pays that much for the $100 bill and whoever has the second higest bid has to pay that much too but gets nothing in return. Make sense? According to Thought Problem #1, the highest bid for a $100 bill was Don's offer of "Around $100". Let's see where it goes now.

Yes I know I don't really have a $100 bill to auction off, but let's just pretend that I do and that you really have to pony up the cold hard cash at the end of the auction. For simplicity sake, let's set the bidding increments at $5 and the opening bid will be $10.

Who will bid $10 for a $100 bill? This thread will end when the bidding stops.

[jdd]

I'm thinking I'd like to be the auctioneer.

[guitone]

I'd bid $10 for $100 (bill or bills) so you can say you have your first imaginary bid.

[kenlarsson]

I'll only bid if it has an imaginary autograph on it, like OJ's.

[iamjohnne]

If this is in fact a virtual auction, I will bid to win the imaginary $100 bill, a mere $15.

[t-bob]

WTF, how much spiked egg nog have you had ?

[epaul]

I can't imagine why someone would get involved with this auction. At some point, someone will bid $100. That someone will be whoever gets the second place money.

Then it gets real expensive. The person who gets stuck in second (bidder A) gets pissed at the bidder who has just screwed him (bidder B), so he bids $105 dollars in order to stick the prick and get out from under the bigger debt. Bidder B then bids $110 to try get the second place money back. The still pissed second place bidder A now bids $150 as it is still a good bet on both ends, finance and revenge. Bidder B now bids ...,

well, perhaps the pattern is clear, this auction could well never end. So why risk getting involved in it. Afghanistan makes more sense (well, no it doesn't).

[Supertramp78]

Paul actually has hit upon the reality of this game. This scenario came from a Game Theory course I'm listening to. It derived from something that Harvard Business Professor Max Bazerman used to do at lectures he would give to CEOs and Wall Street Types. He would set up the above rules and see how far the bidding would go.

At one such meeting of a group of 75 Wall Street investment bankers, the bidding finally stopped at $465.

As Paul pointed out, the guy who bid $95 and gets beat by a $100 bid figures out that if he bids $105, and wins, he only loses $5 instead of $95. But the guy who last bid $100 thinks, "Hey, if I bit $110, and WIN, I will only lose $10 instead of $100." And so on.

When the bidding got to $300 the logic was "I'll only lose $200 instead of $295" and so on untli someone finally just gives up.

Bazerman has run this game at least 600 times and the bidding has never stopped at less than $100. He calls it the "War of Attrition" game.

"Afghanistan makes more sense (well, no it doesn't)."

The protracted war, be it Vietnam or Iraq, or whatever, where there is no real end in sight is an example of this game. Nobody wants to lose but once you get to the point where both sides have lost more than the reward is, you just want to lose less than the other guy so the war goes on and on.

[Supertramp78]

Here it is from Bazerman's book, "Smart Money Decisions"

To see the kind of money mistakes people make, consider the problem that I created for a group of executive students who were attending one of my lectures. I took a $100 bill from my wallet and announced the following:

‘I am auctioning this $100 bill to the highest bidder. All members of the audience are free to participate or watch the bidding of others. Participants are welcome to bid in multiples of $5 until no further bidding occurs. The highest bidder pays the amount he or she bids for the $100. This auction differs from traditional auctions in that the second-highest bidder must also pay the last amount that he or she bid, although he or she will obviously not win the $100. For example, if Warren bids $15 and Charlene bids $20, and then the bidding stops, Charlene will pay me $20 for the $100 bill (earning an $80 profit), and Warren, the second-highest bidder, will pay me $15 and get nothing in return. Who will bid $5 to start the auction?’

I have run this auction many times with undergraduate students, graduate students, and executives, and I have sold $1, $10, $20, and $100 bills. The pattern is always the same, regardless of how much money is at stake. The bidding starts out fast and furious until it reaches the $70-$80 range (on the $100 bill). Then, everyone except the two higest bidders drops out of the auction. The two bidders then begin to feel trapped. One bidder has bid $65 and the other $70. The $65 bidder must either bid $75 or give me $65 (and receive nothing in return). The uncertain option of bidding further (a choice that might produce a gain if the other bidder quits) seems more attractive than the sure loss, so the $65 bidder bids $75. This continues until the bids are $95 and $100.

Then, to everyone’s surprise, the decision to bid $105 is very similar to all previous decisions. The $95 bidder can accept a $95 loss or continue and reduce his or her loss if the other bidder quits. Of course the rest of the group roars with laughter when the bidding goes over $100, which it usually does.

Obviously, the bidders are making money mistakes. But which bids are the mistakes? Twenty-dollar auctions typically end between $20 and $70. However, I have sold a $20 bill for $407, and I have had eleven $20 auctions hit the $100 mark. I once sold a $100 bill for $505. In total, I have earned over $20,000 running these auctions in classes over the last decade.

Then the explanation:

The key to solving this problem lies in indentifying the auction as a trap and, therefore, choosing not to make even a very small bid. The bidders are making three mistakes: failure to consider the decisions of other parties, escalating their commitment rather than accepting a loss, and wanting to beat the other party no matter the cost (i.e. ego).

-----

This is the same logic that makes someone keep sending money to a guy in Nigeria in the hopes of a large payoff even after you have sent more money than you might get back in return. But this sentence is the important one and the one that Paul saw immediately.

"The key to solving this problem lies in indentifying the auction as a trap and, therefore, choosing not to make even a very small bid."

Whether it be this game or Iraq or NIgerian money scams. As they said in the movie "War Games" the only winning move is not to play at all.

[Russell Letson]

Don't gamblers engage in a variation on this kind of thinking--bad gamblers, that is, not the ones who walk away once they've lost their fun money?

[Supertramp78]

In business class in college we called it the good money after bad decision. At what point do you pull the plug on a bad investment, even it it may at some point yield a return? Lots of good money is lost in dry wells becaose people kept drilling long past the leave it decision should have been made. Or to put it another way, how much money are you willing to spend to get the amount of money you have already invested back? The answer is none, since the first amount yielded nothing, you have no track record to expect any additional money to yield better results.

[guitone]

Dec 6, 2008 10:40:38 GMT -5 t-bob said:

WTF, how much spiked egg nog have you had ?

;D ;D

[omaha]

I'm curious why it would ever end.

If you (are foolish enough to) find yourself in a bidding war with another party, and assuming the "house" extends unlimited credit to you, just keep out bidding the other guy. How does the game stop at (pick a number) $400? I don't understand that behavior. Once you and "Joe" have reached $395/$400, what triggers the eventual end of the game?

No matter how much Joe bids, I can always bid one increment more. As a result, I can always force a tie*...which based on my limited understanding of game theory is always the case with a game with perfect information.

At the moment when I've bid $395 and Joe has bid $400, I can either bid $405 or elect to terminate the game and suffer a $395 loss. What incentive do I have to take the loss?

* Assuming a perpetual bidding war is judged to be a tie.

[Cosmic Wonder]

Tramp, are you saying we went to war, both unnecessarily and unprepared?

Had a discussion at work yesterday with some of the soon to be loyal opposition. They don't believe that when Clinton left office we had a budget surplus. They don't listen to the "mainstream media". They believe that we were justified in fighting them 'over there' rather than here. They think the WMD's were there, but are either well hidden and just waiting for us to leave, or they went to Pakistan. They vote. They also think most Iraqi's are happy that we saved them from Sadam.

Mike

[sidheguitarmichael]

Dec 6, 2008 12:43:17 GMT -5 Supertramp78 said:

Bazerman has run this game at least 600 times and the bidding has never stopped at less than $100. He calls it the "War of Attrition" game.

"Afghanistan makes more sense (well, no it doesn't)."

The protracted war, be it Vietnam or Iraq, or whatever, where there is no real end in sight is an example of this game. Nobody wants to lose but once you get to the point where both sides have lost more than the reward is, you just want to lose less than the other guy so the war goes on and on.

Dude, that's depressing. All the years I've been alive, and I still keep finding new contenders for "top ten reasons that mankind is destined to fail as a species"...

[Supertramp78]

Omaha, eventually one person decides to stop. Always. If nothing else, your assumtion that "the house extends unlimited credit" is outside the rule set. nobody has unlimited credit or resources. SO eventually one person will stop.

[omaha]

But where in the rules does it say I can only bid so high?

[Deleted]

Ah, war of attrition! I was teaching this to a class of super smart undergraduates and we played the game live where I auctioned $20. The 'winner' had to get every one ice cream to cover his losses.

GT is (a major part of) my field. I think it's a pretty flawed theory. I am trying to fix that now.

[Supertramp78]

MP, a whole ot of Nobel prizes have been handed out on GT. Go for it.

[Supertramp78]

Dec 6, 2008 14:27:34 GMT -5 @omaha said:

But where in the rules does it say I can only bid so high?

Leave it to the conservative to think you can spend your way out of every problem.