The Dollar Auction

and the psychological factors involved

Have you ever been caught up in a bidding war, only to realise you'd spent more than you intended? The dollar auction, devised by economist Martin Shubik, highlights how easily even rational individuals can become ensnared in irrational decision-making.

Understanding the Dollar Auction

The dollar auction is an interesting twist on the classic auction game. Unlike a typical auction where one person's gain is another's loss, this non-zero sum game has a unique addition: not only does the highest bidder pay their bid and win the dollar, but the runner-up also has to pay their last bid. This setup quickly entangles players in efforts to recover their bids, often leading to spending over the dollar's value, showcasing poor long-term decision-making. This game is a powerful example of how rational decisions can unravel into seemingly irrational outcomes.

In exploring strategies within this auction, players often discuss whether it's smarter to stop bidding or devise mixed strategy approaches t…