$20 auction--Human Irrationalities

http://benbyerly.wordpress.com/2009/02/04/the-20-auction-and-the-dynamics-of-conflict/
This article outlines a specific type of auction that is performed. Increments improve one doller at a time when bidding for a $20 bill. The catch is the first and second highest bidder must pay their bids, but only the highest bidder wins the bill. While some may see bidding more than $20 illogical because nobody would value a $20 for more than $20, it is still found that often times bids continue well beyond this. This is because there are several other factors that eventually play a role in how one makes these decisions. Psychologists find examples of this nature very interesting because of the other irrational aspects that influence us. It is interesting to see that despite how rationally we can create matrices to predict the outcome of an event, people are still heavily influenced by other emotions and irrational behaviors

i've always kinda wanted to see a study of an auction done where the goal a couple people was to spite the winner - ie if the goal is not to win, but to make sure the winner pays the maximum amount.

bidding over 20 bucks is an example of that - you obviously are not maximizing profits any more; you'll only bid if you think someone wants to win so badly they'll outbid you no matter what.

http://www.marketwatch.com/story/lizards-rats-and-the-investors-primitive-brain
This article describes a very similar experiment, but instead of $20, a $100 bill was auctioned off in a second-price auction. Interestingly, although the audience was composed of a number of high-powered financial managers and executives, prices were driven up beyond $100, where everyone was guaranteed to be a loser. The top bid was reported to be $465; even if the second bid/sale price were significantly lower, that's still ridiculous. More evidence that other "irrational" factors not accounted for by traditional game theory can exert heavy influence.

One reason that bids may get beyond $20 is because of the effect that losing will have on the second highest bidder who also has to pay their bid.So, as their approaching $20, if the second highest bidder knows they can't get closer to $20 than the highest bidder without going over, they have incentive to bid over $20. That way they might have to pay let's say $21 but they'll get $20 so they'll only have a net loss of $1 instead of the net loss of $19 if they don't overbid. Then, since they become the highest bidder, the new second highest bidder will also have incentive to overbid and this should continue until someone just accepts their losses. Ideally, I would think they shouldn't go higher than $40 since that would defeat the purpose of initially overbidding $20 because they'll be paying more than the would have paid if they stopped at $19. Clearly the logic begins to break down in the cases where people pay $465 for a $100 bill.