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”.