What is a dollar auction?
Designed by economist Martin Shubik, the dollar auction is a game that explains the paradox of rational choice theory, which assumes that one always makes the most logical decisions. In this obvious paradox, people often take part in dollar bill auctions and bid above par.
- A dollar auction is a simple game in which two participants bid on dollar bills.
- The highest bidder receives the dollar bill and the loser must also pay the amount they bid.
- The dollar auction, designed by economist Martin Shubik, shows the paradox of rational choice theory.
- In a dollar auction, the winner usually pays above the face value of the invoice.
Understand the dollar auction
Dollar Action is a simple game in which two participants bid on dollar bills. The winning bidder receives the invoice. However, the loser must also pay the amount provided. As bids in the game approach or begin to exceed $ 1, the player’s game goals change. Players try to minimize potential losses instead of maximizing potential profits.
The dollar auction begins with the auctioneer accepting the first bid of two participants. After that, it doesn’t make sense for them to stop bidding on the price. For example, if Participant A bids 90 cents in an auction followed by a $ 1 bid from Participant B, Participant A offers $ 1.01 and loses 1 cent or leaves the auction. And you can lose 90 cents.
It is not logical to bid more than $ 1 for $ 1. At the same time, losing 90 cents is not as smart as losing 1 cent. In this game, the rational move is to place a bid that puts Participant B in a similar situation. In other words, you can either bid for $ 1.02 and lose 2 cents, or drop out and lose $. In theory, the bidding process could last forever, as long as both players are committed to winning dollars.
Dollar auction and game theory
Dollar auctions show how rational behavior can lead to undesired consequences. In that sense, it resembles the more widely known prisoner’s dilemma, stipulating that rational individuals may not cooperate with each other, even if it seems to be in their best interests. doing.
American economist Martin Shubik invented the dollar auction to reveal the consequences of what he called “escalation of commitment.” Game theory pioneer Shubik argued that the dollar auction shows that people are obsessed with the idea of losing, even though they know they can lose by winning.
In his 1971 article “Dollar Auction Games: The Paradox of Non-Cooperative Behavior and Escalation,” Shubik especially enjoyed watching the game’s dynamics play in party settings and in front of a large crowd. I said that. “With two bids from the crowd, the escalation paradox becomes a reality. This simple game is an escalation paradigm. Participating in a contest can end up being a disaster for both. “