## 23 January 2012

### How to win money from your rational friends

I found this logic trick at the Futility Closet:
Let’s play a game. We’ll take turns bidding for a dollar bill. Both of us will have to pay our final bids, and the winner gets to keep the dollar.

Not surprisingly, the bidding will soon reach 99 cents. But then I’ll bid \$1.00, giving up any hope of profit but getting at least the dollar for my trouble. And then you’ll bid \$1.01, with the same idea. And so on indefinitely: First we were bidding for gain, but now we’re trying to minimize our losses.

It sounds absurd, but in principle two sane people could go bankrupt playing this game. Yale economist Martin Shubik invented it to show how an irrational decision can be reached by perfectly rational steps.
The key is that all bidders have to pay the amount of their final bid.  I'm definitely going to try to pull this when my cousins come to visit, and may consider it as a fundraising method at a hobby club I'm a member of...

1. When the end result is obviously irrational, then the intervening steps aren't either. At some point, the rational move is to say "screw it, this can only get worse".

2. Although not completely the same, this reminds me of the many "auction" sites popping up on the internet advertising that one can get, let's say, an Ipad for \$23.49. What they don't say up front (although it is in the fine print which practically no one reads anymore) is that each time you bid (at intervals of .01) your account get debited \$1.00. So, in fact you may get that Ipad for \$23.49 which consists of 2349 bids of \$1 each netting the company a whole lot of dough. I believe that even if people did read the "agreement" fine print, they'd still bid anyway!!

3. The rational thing, assuming you have a choice, is to analyze the game and not play it. If you are allowed to talk, the other rational thing is to convince the other person to not bid, one person bids \$0.01 and split the profits. And if the other person defects, just accept a \$0.01 loss. In all the econ experiments I did in college, roughly 1/3 of the population is greedy and will defect, and the other 2/3 are not and will stay with the group consensus. So the rational expected profit is about 2/3*\$1.00/2 - 0.01 = \$0.32

Those online "qubid" type sites should be outlawed. It's basically just extracting money from ignorant people.

1. "It's basically just extracting money from ignorant people."

... and, apparently, it's not the only game in town...

4. Even ebay, etc suffers from this. If you can buy something new for \$50 (with free shipping), you'll see it on ebay with the final bid of \$60 (plus shipping). Makes no sense to me!

5. I don't get it.
Why would I ever bid \$1.01 for a dollar?
Unless these bids somehow fall through a trap door or something.

6. Never mind, I re-Read the question Both of us will have to pay our final bids, and the winner gets to keep the dollar.

7. I get the idea...especially with the auction site examples used in the comments above. But I don't follow how the initial "game" would work if it is only you and a friend playing. Who are the final bids paid to in that format?

Sure, if you have two friends and offer to auction a dollar off while the proceeds come to you, then it works. But it seems you would HAVE to have a 3rd party involved to make this work. Right?

8. Can not all of you see that this is exactly what we have been doing with our country: Throwing money (= power) away to try and minimize the loss that is the previous generations' United States of America?
-Jimbo