Tag Archives: auctions

The Transformative Power of a Narrative

Can a narrative attached to an everyday object increase its objective value? That was the question posed by Rob Walker (author of The New York Times‘ Consumed column) and Joshua Glenn (author of Taking Things Seriously) when they started the Significant Objects Project—an experiment designed to test whether a series of stories created about an object will increase its selling price.

After buying 100 “unremarkable” objects with an average price of just under $1.29 each, the two advertised them for sale alongside narratives created by volunteers. They then sold for a total of $3,612.51—more than 28 times their original price.

Dan Ariely of Predictably Irrational discusses the project and its findings:

The results may seem surprising, but this is actually something we see all the time. It’s the basic idea behind the endowment effect, the theory that once we own something, its value increases in our eyes. […] But ownership isn’t the only way to endow an object or service with meaning. You can also create value by investing time and effort into something (hence why we cherish those scraggly scarves we knit ourselves) or by knowing that someone else has (gifts fall under this category).

And then there’s the power of stories: spend a fantastic weekend somewhere, and no matter what you bring back […] you’ll value it immensely, simply because of its associations. This explains the findings of the Significant Objects Project, and also how other things like branding works.

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.

Optimum Starting Prices for Negotiations and Auctions (and Why)

A high initial offer in negotiations is more likely to lead to a high final price, yet in auctions a low start price is more likely to lead to a high final price.

These are the findings of a recent study that attempted to find the optimal starting prices for negotiations and auctions.

In negotiations (where the number of actors is often predetermined), starting prices drive cognitive processes, leading individuals to selectively focus on information consistent with, and make valuations similar to, the starting value. Thus, starting high will often lead to ending high in negotiations. Conversely, in auctions (where the number of actors is determined during the course of the auction), low starting prices catalyze social processes that can lead to higher final prices: Low starting prices lower barriers to entry and increase the number of bidders; produce more sunk costs for early entrants; and lead participants to infer greater value from this increased bidding activity, resulting in herding behaviour.

As Mind Hacks summarises: negotiation relies heavily on the anchoring effect (of which there are “few psychological phenomena as robust”), whereas in auctions “price rise [is] driven by social competition and so starting with a low entry point encourages more people to join in; once someone has bid, they have made a commitment which is likely to encourage them to continue; and finally, more bids leads us to infer that the item has a higher value”.