The True Value of a Dollar
Source: http://www.studyingeconomics.ac.uk/blog/game-theory-real-world-examples/\
When people account for game theory, there can be instances in which a dollar becomes worth more than a dollar. Professor Shubik at Yale University created a game called the Shubik’s Dollar Auction game, in which he tested the worth of a dollar in various scenarios. In the game, the bidder who puts the maximum bid will win the dollar. However, the bidder who puts the second highest bid will lose the amount he/she bids. Since neither of the bidders want to lose the amount he/she bids by losing to the higher bid, these two bidders will continue bidding, even if the bid price exceeds the value of the dollar. According to the article, this is an instance of “self-interested behavior”, because neither of the bidders want to lose the money that he/she bids. If one of the bidders drops out of the bid early, then neither of the bidder will lose as much money. However, since neither of the bidders want to be the one to lose the money from being the second highest bid, both of the bidders will continue bidding higher and higher.
This relates to the Prisoners Dilemma mentioned in class. In the Prisoners Dilemma, if both the prisoners choose to act unselfishly, then that will help them achieve the best result overall with the least combined years in prison. However, the Nash equilibrium is when both the prisoners choose to act selfishly and rat out the other prisoner, which results in a worse result than if both the prisoners choose to act unselfishly. Likewise, in Shubik’s Dollar Auction game, the most optimal situation for both bidders occurs when only one bidder bids on the dollar with one cent and the other bidder chooses not to bid on the dollar. As a result, neither of the bidders will lose money and the winning bidder will earn the maximum amount possible