Tell everyone you're going to auction off a buck. Then say that to pay for expenses the second highest bid will have to be paid anyway. And everyone should say "Fine, cool, get on with it."

Bids will fly. 1 cent. 2 cents. 7 cents. 15 cents. 24 cents. 46 cents. 49 cents. 50 cents. After a while, it becomes evident that unless they win the buck, they'll have to shell out some change. Which no one particularly wants to do, so the bids climb. 60 cents. 70 cents. 80 cents. 90 cents. 95 cents. 96. 97. 98. 99.

Pause, while it sinks in that it would be better to earn nothing than to pay 98 cents.

1 dollar!!

Another pause, while it sinks in that it would be better to pay 1 cent than 99 cents.

1 dollar and a penny!

And so on until someone either gives up or falls asleep. Either way, you end up with a lot more money than you started with.

My social psychology professor played this game in class once, to demonstrate something-or-other, almost certainly linked to her concept of mindfulness, which is all she ever talked about.

She auctioned off a $10 bill, and, no kidding, bidding reached $24 or so before she shut it down. And she did, actually, complete the transaction. The "loser" was pretty upset, and may have gotten his money back after class, for all I know. Still, it was a great show, and a good time was had by all. You have to wonder, though, whether people continued to bid to cut their losses, or out of pride. People are funny like that...

I wouldn't be surprised, actually, if she kept the students' money. She was a complete lunatic as far as professors go, but apparently rather shrewd. Just don't play this game in a bar, though, because it's very likely to get you beat up.

William Poundstone, in his book, Prisoner's Dilemma, attributes the dollar auction to Martin Shubik and his colleagues, John Nash, Lloyd Shapley, and Melvin Hausner at the RAND corporation. (Shubik published the game in a paper in Journal of Conflict Resolution in 1971). As game theorists, they were looking for ways to incorporate pathological behavior into a game, in this case, addiction, and they wanted to make it easy enough to do as a parlor game.

Though it may be irrational to pay more than one dollar for a dollar, at any stage of the bidding, the second highest bidder can rationally improve his or her position by incrementally outbidding the first highest bidder.

The escalating commitment involved has been used to analyze labor negotiations, business investment, military strategy, why people stand in line for an hour for a two minute roller coaster ride, and even romantic relationships. Stewart Brand used to play this game to illustrate the psychological underpinnings of a nuclear arms race.

Source: William Poundstone, Prisoner's Dilemma, Doubleday, NY 1992

Running a dollar auction can be a good way to make a little money (provided you have some guarantee that both the winner and the loser will pay up) however it is not as perfect a scheme as it might seem.

This is because you will only make a few dollars before people realise they're only digging a bigger hole for themselves and stop bidding. You could run a lot of dollar auctions but as word gets round people will stop taking part.

The one thing you must never do is auction off a large some of money in this way. The reason is that sooner or later people will start to work together. You could probably get away with five or maybe even ten dollars but GO NO HIGHER! Say you were to say hold a "fifty dollar auction" then something like this might happen:

You: "Ok everyone this is a "Fifty Dollar Auction" you know the drill: the two highest bidders pay and the highest bidder gets the money! So any offers for fifty dollars!"

Fool 1: "One cent"

Fool 2: "Two cents."

Fool 3: "Twenty cents"

etc etc

Fool 20: "Eight bucks"

Fool 1 (to other fools): "Hang on a second I've got an idea. I'll bid ten bucks and then none of you guys bid and I'll win the fifty. Then I'll keep ten bucks to cover my losses and we'll split the rest of the money, that we all make an easy two bucks."

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