Awasu » Greed, fear, then suicidal vengefulness
Thursday 14th April 2005 12:05 PM [General]

I've always been fascinated by what makes people tick. I'm re-reading Influence: The Psychology of Persuasion right now and studying The Prisoner's Dilemma was a life-changing process.

This showed up in my Awasu today and talked about some things I hadn't really thought much about before.

Psychologist Max Bazerman says that during the past ten years he has earned more than $17,000 by auctioning $20 bills to his MBA students at Northwestern University. In the course of almost two hundred of his actions, the top two bids never totaled less than $39, and in one instance totaled $407.

How does such a thing happen?!

It's sometimes referred to as the winner's curse and the phrase popped up quite a bit during the Google auction IPO 🙂 But this kind of thing is prevelant in many aspects of the things we do, basically anytime we're competing with others for some resource: a house for sale, a job, world domination (seriously! How much money did the US and USSR sink into the arms race?).

The best linked-to article is this one:

What does it all mean? It means that there are other forces driving human negotiation - an auction is a classic negotiation - than reason.

This auction is driven first by greed, then by fear, and finally by a kind of suicidal vengefulness.

Why are people so weird? 😕 🙂

4 Responses to this post

This is why EBAY has become almost completely useless, as far as i'm concerned. It started out as a kind of hugely-scaled yard sale where you could get a good deal on stuff people no longer wanted/needed. Now it's people (and robots) competing to get the last auction click in to win their prize. Frequently bumping the cost of used or questionable goods above retail. What's up with that? If I can walk into a local shop and get the same thing for less, why should I even bother with ebay junkies!

I agree, people ARE weird.

On the other hand, if people were only ever prepared to pay exactly what a good or service was worth, and could figure that out; there would be no profit in any kind of business.

I used to tell my eCommerce students that the net at its best is like having every single one of your competitors sharing your front door, that in addition, I could access your suppliers and their suppliers and that, with only a little skill and research, I would be able to figure out exactly what that item cost you, your overheads and your time at a standardised rate, at which point I would know precisley the value of the product and would refuse to pay more.

Profit is in fact a measure of ignorance times inconvenience. If it would cost me more to seek out a better price or figure out what that price should be than I would save, plus the cost of my time, then I will buy from you. The secret is in optimising the cost of that search and multiplying it by your ignorance.

On the other hand, paying more than $20 for a $20 indicates that profits will not be in short supply for quite a while yet.

Just read the whole story and its more complex than suicidal vengeance. Because the rules say that the second highest bid also has to pay up, there is a transition phase at about $15 I suspect, where they both realise that one of them is going to lose and pay a whole amount for zero return. It then becomes a better deal to bid, say, $25 and get the $20 subsidy so that the net cost to me is a loss of $5 only. But since both players realise this, they are forced to raise the stakes until either acceptance of the loss clicks in or the suicidal stuff takes over.

There are systems that can produce better outcomes in many circumstances. The stable marriage problem (see http://en.wikipedia.org/wiki/Stable_marriage_problem) and its variants attempt to match two sets of participants (which could be buyers and sellers), so as to maximise the total outcome. It's no longer a zero-sum game. Most well organised markets (e.g. metals exchanges) work like this to some extent. However, as Earl points out, efficient functioning depends on knowledge, which comes at a cost, and this doesn't work at all well in consumer markets. This is the basic fallacy of free market ideologies.

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