What would cause someone to bid more than $20 for a $20 bill? Max Bazerman of the Harvard Business School routinely auctions off $20 bills and gets bids above $20. Are the bidders dull? No, they are usually very bright people who have been tricked. The rules of the auction are simple enough: – No talking among bidders. – The first bid has to be a whole number of dollars. – Subsequent bids have to go up by exactly one dollar. – No bidder can bid twice in a row. – The highest bidder pays the bid amount and gets the $20 bill. – The second highest bidder must pay his or her final bid but get nothing in return. The last rule is a strange one and it turns out that’s the catch that leads to high bidding. But I’m getting ahead of myself. Imagine a typical scenario: An adventurous person throws out a bid of $1. Then someone bumps it to $2. This continues until Bob bids $18 and Alice bids $19. Without thinking it through, one might think that the bidding should be over. Aft...

It is well known that the winner of an auction tends to be the person who most overestimates the value of the item being auctioned. The loss resulting from overpaying has been dubbed the “winner’s curse.” In a study of the winner’s curse ( full text here ), researchers conducted experiments to see if poor value estimation skills were really the main cause of overpaying at auctions. These experiments involved having people participate in auctions under different conditions. The main difference was that some auctions were conducted with several people, and others had people compete against a computer algorithm (and they knew that is was a computer). The results showed that when people outbid a computer algorithm, their bids tended to remain at rational levels. However, when people compete against other people in an auction, the winning bid tends to be significantly higher. This suggests that people tend to become competitive and willing to overpay just so that they won’t “lose” to ano...