[2014-12-30] Dollar Auction

[agate]

Bob: "I bid one penny. Hey Alice, if you don't bid, I'll give you 50 cents."
Alice: "Sure, sounds good."

For every baffling free-market problem, there's a simple cartel solution.

[dangerkeith300]

It gets a little more complicated than that when there are many, many bidders and not just two.

[mrjones]

So I read the Wikipedia article on this and I still don't think I get it:

"The game begins with one of the players bidding five cents (the minimum), hoping to make a ninety-five-cent profit. He can be outbid by another player bidding ten cents, as a ninety-cent profit is still desirable. Similarly, another bidder may bid fifteen cents, making an eighty-five-cent profit."

So how are these people being rational? bidding 5 cents "hoping" that noone else will bid seems retarded?

[Jin]

Hey. The mans choice to bid only 1.01 seems rational at first, but if he can choose the amount he bets (betting doesn't have to be 1c each time) and puts the other person in the same position, yet expects an irrational response from them, I feel that is a irrational choice of bid. Same for the woman that goes to infinity dollars. It only would get like that if the people weren't allowed to rationally consider their opponents options.

I feel like the most rational sequence would be to bet 1 dollar at the start (or 1.XX with XX being what the other person bet if they went before you and betting wouldn't lose you more money than not betting), after recognizing that a purely rational player has no incentive to stop betting until betting would lose them more money than not.

Or not to play.
Unless you are going against what you KNOW is not an infinitely rational, infinitely greedy being.

Then the well-informed rational choice would be to bet enough that the other player has no incentive to bet for the money that they would win. Say 90c.
Which the perfectly informed individual should know? I'm not really an economist, so I don't know the model well enough to assume either way.

[Jin]

Actually, if you are the first to bid the most rational choice would be to bid 99c, sorry.

And if you don't know anything about your opponents, and they bet 1$ or more, then you know they are irrational and have no cause to stop.
So you give up right there to minimize loss.

Of course if every opponent has to bid once things really get complicated...

[mrjones]

I looked at the talk page for the Wikipedia article, and it seems that the article (and Zach's comic) is basically incorrect and the point of the game is NOT to show that "rational choices can lead to irrational behaviour" (which is, as far as i understand, nonsense), but rather to argue that people will typically not behave rationally in this kind of situation.

[Guest]

This game is inherent biased in favor of the auctioneer. For example, if the auctioneer has a sockpuppet betting, he or she stands to loose nothing in the exchange. Unless you have information on the people betting, the most rational thing to do is to bid farewell.

[SomeGuyNamedDavid]

"A strange game. The only winning move is not to play. How about a nice game of chess?"

[Liger]

The economic definition of rationality is that "a choice is rational if making said choice will result in more profit than not making the choice."

(person A)Betting .05 is better than not betting by 95 cents.
(person B)Betting .10 is better than not betting as well, this choice nets me 90 cents.
(A) Betting .15 is better than losing the bet and paying .5, now I'll make 90 cents by making this bet.
(B) Betting .20 is better than losing the bet and paying .10, now I'll make 90 cents by making this bet.

The process continues. Every time, betting is the rational choice because making the bet and winning results you having 90 more cents than if you didn't bet and lost. The amount changes depending on the number of bidders, but unless the net choice amount winds up being a dollar or greater the result is the same.

This continues infinitely. Even if you're betting a million dollars, betting gives 90 cents more than if you quit after betting 999,999.90. That's the paradox, that all economically rational parties must either bet infinite money or make an economically irrational choice (not betting, which always results in greater loss than betting)

"Logically" (technically the choice is persuasion by pathos but we'll call it "logic" instead), you bet the largest sum you wouldn't care to lose and nobody in their right mind bets more than a dollar, or you bet nothing because you feel like you loss is already guaranteed. But that's irrelevant.

[Casey]

The rational solution is to hit the auctioneer over the head with a big stick and run away with the thing AND your dollar.

[Casey]

The most rationalized thing you could do would be to convince yourself you didn't really need that thing you're bidding on anyway.

[Guest]

The economic definition of rationality is that "a choice is rational if making said choice will result in more profit than not making the choice."

Seems like naive/strawman rationality to me. A truly rational agent should be able to model other rational agents and realize that the bidding game is a losing proposition and just not participate.

[Frank]

The game is supposed to be applied with real life application...

Two companies buying out a third one. Both of them does not want to let the other control too much of the market. At one point, you're overbidding, more than you should... But that never happens, right?

The real life example: the last cookie in the box with your brother. At one point the quantity of energy spent arguing is greater that what you'll get (minus the fist fights).
Or the last nice looking girl of a club. She'll see it's not a Mercedes...

[Geist]

The game is supposed to be applied with real life application...

Two companies buying out a third one. Both of them does not want to let the other control too much of the market. At one point, you're overbidding, more than you should... But that never happens, right?

The real life example: the last cookie in the box with your brother. At one point the quantity of energy spent arguing is greater that what you'll get (minus the fist fights).
Or the last nice looking girl of a club. She'll see it's not a Mercedes...

Are you suggesting that women are objects to be bought and sold?

If so, take my wife, please. $5 no question asked.

[derp]

I looked at the talk page for the Wikipedia article, and it seems that the article (and Zach's comic) is basically incorrect and the point of the game is NOT to show that "rational choices can lead to irrational behaviour" (which is, as far as i understand, nonsense), but rather to argue that people will typically not behave rationally in this kind of situation.

Quoting your Wikipedia article directly:

The dollar auction is a non-zero sum sequential game designed by economist Martin Shubik to illustrate a paradox brought about by traditional rational choice theory in which players with perfect information in the game are compelled to make an ultimately irrational decision based completely on a sequence of rational choices made throughout the game.