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People sometimes overpay at auctions, and that’s alright.

https://journal.classiccars.com/2019/10/25/preserved-original-lamborghini-miura-rm-sothebys-london/ 

 

When one thinks of an auction, the first thing that comes to mind is the traditional English auction, in which an auctioneer opens the auction at some opening price, after which interested bidders compete by submitting increasingly higher bids until someone places a bid that no other bidder is willing or able to match. The item is then sold to the highest bidder at a price equal to his or her bid [1]. Connecting this back to material from the course, this auction is an example of an open-outcry ascending bid auction.   

Perhaps nowhere else is the English auction more common than in automobile auctions, and particularly highly desirable classic car auctions. Such auctions take place regularly all over the world and have done so for decades. As such, auction houses that specialize in such automobile auctions have usually been around for a very long time and are consequently very experienced in estimating the market value of cars they plan to auction. 

One such auction house is RM Sotheby’s, which describes itself as “the market leader in the global automotive auction scene”, and they indeed have the stats to back that up [2]. RM Sotheby’s auctions are generally run as normal English auctions as described above [3], but interestingly, RM Sotheby’s puts out their estimates for the winning bid on each lot before the auction begins. Now, what we have learnt in lecture tells us that in such an auction, the dominant strategy for any rational bidder is to keep on bidding up till the car’s value is reached. Intuitively, this should mean that each car sells for its estimated value and not any more, but as we see in the article linked above, this is not the case.

So why does this happen? There are two possible situations that could cause this supposed overpayment. The first possibility is that RM Sotheby’s undervalued the value of their cars in their estimations, however given the history and experience of the auction house, this is not likely. The other possibility is that the  bidders were not making their decisions rationally. Now once again, given that most bidders in such auctions are extremely rich and are almost certainly very experienced in such auctions, this also does not seem too likely at first glance, but taking a closer look at the specifics of the auction in the article, things start to make a little more sense.

The auction held by RM Sotheby’s was actually a charity auction, with all the proceeds of a private collection known as The Forests Collection going to the Trillion Trees Initiative, an environmental charity that would use the money to restore over 400 hectares of degraded forests in East Africa [4]. This collection was estimated to raise $591,000 but actually ended up raising $641,000. This discrepancy between the estimated and actual winning bids can be explained by the fact that the bidders, who knew that their money would be going towards a good cause, were comfortable bidding a little more for the vehicles than their true value.

Although traditionally, bidders bidding more than their true value for any item in an auction is considered a bad outcome for the bidder, the auction described above is an example of one in which bidding irrationally is actually a better outcome for the bidder and for society as a whole, flying directly in the face of Adam Smith’s economic theory, which states that the best economic benefit for all is accomplished when rational individuals act in their self-interest [5].

 

[1] https://en.wikipedia.org/wiki/English_auction

[2] https://rmsothebys.com/en/home/about-us/#/sect-430209

[3] https://rmsothebys.com/en/home/buy/#/sect-337121

[4]https://www.barrons.com/articles/rm-sothebys-offers-a-private-car-collection-to-raise-funds-for-environmental-charity-01569607212

[5] https://www.investopedia.com/terms/s/self-interest.asp

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