Auctioning off a dollar
I used to do this with some of my graduate economic classes during the Vietnam war as an illustration of the irrationality of being swayed by sunk costs.
I'd offer to auction off a dollar to the class. The rules of the auction were as follows. As usual in an auction, the final highest bidder wins the dollar. Not so usual, all bidders must pay their highest bid to the auctioneer, win or lose (I would use the proceeds to fund a class party at the end of the term). Finally, a new bid had to raise the price by a minimum of ten cents.
Initial bids were sometimes hard to come by, but as the time went on with no one bidding, someone would eventually conclude that there was a dollar to be got cheap and would bid something like, say a quarter. Things usually remained quiet at that point until I would get to the "going, going, ..." Generally someone would say to himself, "Gee, I'm not going to let that guy get away with buying a dollar for only 25 cents," and would raise the bid to 35 cents. Sometimes, more than one person would get involved. Occasionally, I would get five or six people bidding, but you could usually keep the game going even if only two were bidding.
Now, the first bidder sees that he stands to lose a quarter unless he raises the bid, so he goes to 45 cents, and the fun begins. Eventually, someone gets the price up to 95 cents, so the next bid would have to go over a dollar. People tend to be reluctant to bid more than a dollar for a dollar, until the auctioneer points out that they stand to lose 85 cents if they don't bid, whereas if they do bid $1.05 and win, they will only lose a nickle. So, you can usually get the guy to raise the bid to $1.05. Now, the guy with the 95 cent bid stands to lose 95 cents if he doesn't go up to $1.15. If he wins at that price, he would only lose 15 cents instead of 95 cents, so on goes the bidding. Usually, I could get the bid up to about $2.50 before the bidders realized they were being suckers. Once, I even got the top bid up to about $5.00.
In the end, I would turn to the rest of the class and make some comment about selling a dollar for $2.50.
Now, folks, I leave you to think about how that lesson applies to the Iraq war.
I'd offer to auction off a dollar to the class. The rules of the auction were as follows. As usual in an auction, the final highest bidder wins the dollar. Not so usual, all bidders must pay their highest bid to the auctioneer, win or lose (I would use the proceeds to fund a class party at the end of the term). Finally, a new bid had to raise the price by a minimum of ten cents.
Initial bids were sometimes hard to come by, but as the time went on with no one bidding, someone would eventually conclude that there was a dollar to be got cheap and would bid something like, say a quarter. Things usually remained quiet at that point until I would get to the "going, going, ..." Generally someone would say to himself, "Gee, I'm not going to let that guy get away with buying a dollar for only 25 cents," and would raise the bid to 35 cents. Sometimes, more than one person would get involved. Occasionally, I would get five or six people bidding, but you could usually keep the game going even if only two were bidding.
Now, the first bidder sees that he stands to lose a quarter unless he raises the bid, so he goes to 45 cents, and the fun begins. Eventually, someone gets the price up to 95 cents, so the next bid would have to go over a dollar. People tend to be reluctant to bid more than a dollar for a dollar, until the auctioneer points out that they stand to lose 85 cents if they don't bid, whereas if they do bid $1.05 and win, they will only lose a nickle. So, you can usually get the guy to raise the bid to $1.05. Now, the guy with the 95 cent bid stands to lose 95 cents if he doesn't go up to $1.15. If he wins at that price, he would only lose 15 cents instead of 95 cents, so on goes the bidding. Usually, I could get the bid up to about $2.50 before the bidders realized they were being suckers. Once, I even got the top bid up to about $5.00.
In the end, I would turn to the rest of the class and make some comment about selling a dollar for $2.50.
Now, folks, I leave you to think about how that lesson applies to the Iraq war.
posted by walldon | 10:41 AM
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