Penny/Dollar Auction Psychology (The Workings of Swoopo)

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.