You're both right (though derp is more right in that that's what the thought experiment was designed to illustrate). Decisions made during the game are not rational, in the classical sense.derp wrote:Quoting your Wikipedia article directly:mrjones wrote: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.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.
When playing alone the rational choice is to bid minimum. (this much is true)
When playing against a non-zero quantity of completely rational opponents the rational choice is to bid 99 cents. (this is the usual decision pattern, and I'm going to show it's bullshit)
When playing against even a little irrational opponent (such as someone who generally follows only profit, but also has a desire to "win") the rational move is not to play. Your risk is 99 cents, your reward is 1 cent, thus (even assuming you have much larger stocks of money, and assign the same value to a cent lost as a cent gained) even a collections of opponents who are together 1.1% likely to outdo your 99 cent bid will statistically make you lose money.
It's ultimately impossible to know all your opponents to such a degree without expending significant resources (likely to exceed your 1 cent gain). Thus the rational move is to never play Dollar Auction.