Networks

This article deals with the phenomenon of overspending in auctions.

The attraction of participating in an auction is the potential to come away with a great deal. However, ironically, there is a tendency for participants to end up overspending and thus negating the benefit they should have gotten. As discussed in class, there are best strategies that can be employed in each different type of auction to maximise the chances of getting the best value for money. However, in practice, real bidders often behave very differently. What drives this seemingly irrational behavior?

The article touches upon the many factors that are at play during an auction, for example “social proof” which refers to the idea that people are influenced by others’ opinion of the object for bid, and so receive validation that the item is worth it. Another factor is the principle of scarcity-there is only one of the item, and there is a time constraint. However, the most important element is the element of competition-the bidders are not just paying to own the item, but rather they are paying for the opportunity to feel like winners.

This relates to our discussions in class on Game Theory, and highlights the fact that payoffs are often extremely difficult to capture in attempts to rationally deduce the best decision. Factors that may confound strict mathematical calculation include the circumstances under which the auction takes place-at an auction where friends and family members were present, a person might be driven to make extreme bids in an attempt to impress those important to them, or a person with low self-esteem might need this external display of success in order to validate themselves.

This article shows how human nature and the effect of group-think can have a huge effect on our decisions, both large and small, and demonstrates the interrelatedness and interdependence of our actions and decisions on others.