I first heard of the bid­ding fee scheme/online auc­tion site Swoopo in a Cod­ing Hor­ror post that takes a look at the company’s busi­ness plan, call­ing it “pure, dis­tilled evil”. It’s also a pretty sim­ple (or, as the post said, “bril­liantly evil”) plan:

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.

A few month later Mark Gimein pro­duced a widely-shared (and frankly inferior) rehash of Atwood’s arti­cle, call­ing Swoopo “the crack cocaine of auc­tion sites”.

How­ever my inter­est piqued again as Jonah Lehrer picked up on the neu­ro­science of bid­ding fee schemes, not­ing that the suc­cess of Swoopo isn’t just down to our irra­tional­ity toward appar­ent sunk costs and divesti­ture aver­sion, but also how our dopamine cir­cuitry works.

What’s inter­est­ing about this sys­tem is that it’s all about expec­ta­tion. Our dopamine neu­rons con­stantly gen­er­ate pat­terns based upon expe­ri­ence: if this, then that. They real­ize that the tone pre­dicts the juice, or that bet­ting on the lap­top might get us a dis­counted reward. This means that our dopamine cir­cuitry isn’t just tit­il­lated when we win the auc­tion — those pre­dic­tive cells are excited every time we bid, as they wait to see whether or not the reward will arrive. […]

This, in a nut­shell, is how Swoopo works. It’s one near-miss after another, as we bid and then bid again. The expe­ri­ence feels awful — we know we’re wast­ing money — and yet we can’t look away.

As noted in a Mind Hacks post look­ing at dopamine func­tions dur­ing gam­bling tasks; “although near-misses were expe­ri­enced as aver­sive they increased the desire to play the game”.

Now behav­ioural econ­o­mist Richard Thaler has pro­duced a piece on dol­lar auc­tions and Swoopo that again reads like a poor rehash of Atwood’s article.