Where Game Theory Ends

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Where Game Theory Ends

Post  Matt Dolph on Mon Jun 01, 2009 12:03 am

This article is again about the quasi all-pay auction site swoopo.com. This article takes an interesting look at how quickly an auction of this type moves from being, in theory no more profitable than a second-price auction to being extremely profitable as far as expected revenue when people disband their mathematical best response options and begin to play/bid with emotions and justify their already sunken investment.

http://www.codinghorror.com/blog/archives/001196.html

Matt Dolph

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Re: Where Game Theory Ends

Post  mrv528 on Mon Jun 01, 2009 12:19 am

This site, and other auction sites like it seem to be scams. In the end, it seems like most bidders will end up getting ripped off because they have to pay even if their bid doesnt win. It is an interesting concept, but like they said in the article, it seems to be like a lottery (in that it is basically a waste of money, and completely up to luck.... while the odds are NOT in your favor). "There's something else at work here, though, and it's almost an exploit of human nature itself. Once you've bid on something a few times, you now have a vested financial interest in that product, a product someone else could end up winning, rendering your investment moot. This often leads to irrational decisionmaking -- something called the endowment effect, which has even been observed in chimpanzees. So instead of doing the rational thing and walking away from a bad investment, you pour more money in, sending good money after bad."
That really is something that game theory discussed in our class has not taken into account.

mrv528

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Re: Where Game Theory Ends

Post  Matt Watras on Mon Jun 01, 2009 12:57 am

This article backs up how swoopo is a scam: http://freakonomics.blogs.nytimes.com/2008/12/16/an-all-pay-auction/. It describes a modified all-pay auction in its example where only the top two bidders have to pay, and its pretty easy to imagine how the combined revenue of the top two bidders can easily outstrip the value of the piece being auctioned.

This brings up an interesting ethical question: suppose, somehow, that you have some moderate success at winning items at an abnormally low price in these all-pay auctions. Does this still justify the insanely high revenue the auctioneer generates?

Matt Watras

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Re: Where Game Theory Ends

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