Learning about auctions in class recently was an…interesting experience.  To tell the truth, I had very little knowledge on the subject beforehand, so my mental image of the process consisted solely of men in suits waving their little IDing numbers as someone raises the price.  Therefore, it came as quite a surprise that what I now know to be called Ascending Bid, or English Auctions, was actually just one in a wide variety of auction types.  From minor variations such as the Dutch auction, where prices go down until someone buys, to seemingly strange ones like the Vickrey auction, where the winner pays the second highest bid, to ones that seem flat out unfair, like the All Pay Auction that has every bidder paying their bid, but only the winner getting the prize.  What seemed even more amazing was that most of these auctions have an optimal bidding strategy.  With a bit of knowledge, you can figure out the bidding price that maximizes your profits.  However, after a while the initial interest started to wear off.  Even with the variety of auctions, if everything were so cut and dry as to simply bid the optimal price, what difference is there between going to an auction and simply shopping at a supermarket?

After looking around the web in an attempt to renew my interest, I found a variety of tasty tidbits.  Ironically logical advice, such as the advantages of attending auctions in inclement weather (less competitors), and practical tips on what to sell and what not to sell, kept me entertained for a good bit (I am easily amused).  One of the things that most attracted my attention, though, was the concept of Auction Fever and its ilk, discussed in a question and answer article with Harvard professor Deepak Malhotra.  The basic concept of Auction Fever is pretty simple:  the competition, the heat of the moment, and the awareness of others watching making people bid far more than they normally would.  A related topic, Escalation of Commitment, brings up the interesting point that the effort gone into trying to obtain the item can be counted as a negative payoff should the buyer not manage to win.  The third concept of the trio, the paradoxical Winner’s Curse, deals with how those who don’t have a clear idea on the true price of an item often overpay if they win, resulting in a miserable state despite their apparent success.  It goes on to suggest ways for businesses to use these principles to their advantage, with auctioneers deliberately using competitive language to putting the figurative spotlight on bidders to increase audience awareness.  With these additional factors thrown in, watching an auction progress could become decidedly more interesting.  Humans are not, after all, always rational beings.  There is even evidence that those experienced in going to many auctions does not decrease in irrational behavior.  Therefore, a little competition, a bit of clueless ness, or a slight change in setting, almost guarantees to change an orderly little auction into something a lot more exciting.

Read about Auction Fever and the like at:  http://hbswk.hbs.edu/item/4661.html