Professor Max Bazerman teaches a class at the Harvard Business School on how these two factors collide. Every year, on the first day of class, he holds up a U.S. twenty dollar bill and announces that he’s putting it up for auction.
There are only four rules:
1. Everyone is free to bid
2. All bids must be in $1 increments
3. The winner of the auction wins the bill.
4. The runner-up must still honor his/her bid while receiving nothing in return.
At the beginning of the auction, people see the opportunity to get a $20 bill for a bargain. The hands go up quickly and the auction is underway. As Bazerman describes it, “The pattern is always the same. It’s fast and furious until the bidding gets to around $12-16.”
Then the reality of the situation begins to dawn on the group and everyone drops out except the two bidders.
Without realizing it, the two bidders get locked in. One bidder has bid $16 and another has bid $17. Up to this point, all the bidders were looking to make some easy money. But now neither one of them wants to be the sucker who pays for nothing. That’s when they make their classic error: They’re not playing to win. They’re playing “not to lose”.
As the price gets closer to $20, the other students don’t know whether to watch or cover their eyes. Because when the price hits $20, look at what’s going through their minds. The person who’s sitting behind at $19 is thinking, “Wait. If I stop, I’ll have to pay $19. But if I go ahead and bid $21, then I’ll technically be losing money…but a $1 loss is better than a $19 loss.”
And so s/he bids $21 for a $20 bill. Following the same logic, the other person goes to $22….and then $23….and higher.
From a rational perspective, the obvious decision would be for a bidder to accept his loss and back down. But that’s easier said than done. The bidders are pulled by their commitment, loss aversion and fear, so they continue to bid. In one case, the bidding stopped at 204 dollars!
The deeper the hole they dig themselves into, the more they continue to dig.
And, that’s not really surprising. Because, when you look around…..we all do this in some area of life.
The question is: how quickly can we spot a losing situation and get out of it before the damage becomes too great?
Source: `Sway The Irresistible Pull of Irrational Behaviour` by Ori Brafman and Rom Brafman, 2008
Thanks Nicola de Corato for sharing this on his blog.
There are only four rules:
1. Everyone is free to bid
2. All bids must be in $1 increments
3. The winner of the auction wins the bill.
4. The runner-up must still honor his/her bid while receiving nothing in return.
At the beginning of the auction, people see the opportunity to get a $20 bill for a bargain. The hands go up quickly and the auction is underway. As Bazerman describes it, “The pattern is always the same. It’s fast and furious until the bidding gets to around $12-16.”
Then the reality of the situation begins to dawn on the group and everyone drops out except the two bidders.
Without realizing it, the two bidders get locked in. One bidder has bid $16 and another has bid $17. Up to this point, all the bidders were looking to make some easy money. But now neither one of them wants to be the sucker who pays for nothing. That’s when they make their classic error: They’re not playing to win. They’re playing “not to lose”.
As the price gets closer to $20, the other students don’t know whether to watch or cover their eyes. Because when the price hits $20, look at what’s going through their minds. The person who’s sitting behind at $19 is thinking, “Wait. If I stop, I’ll have to pay $19. But if I go ahead and bid $21, then I’ll technically be losing money…but a $1 loss is better than a $19 loss.”
And so s/he bids $21 for a $20 bill. Following the same logic, the other person goes to $22….and then $23….and higher.
From a rational perspective, the obvious decision would be for a bidder to accept his loss and back down. But that’s easier said than done. The bidders are pulled by their commitment, loss aversion and fear, so they continue to bid. In one case, the bidding stopped at 204 dollars!
The deeper the hole they dig themselves into, the more they continue to dig.
And, that’s not really surprising. Because, when you look around…..we all do this in some area of life.
The question is: how quickly can we spot a losing situation and get out of it before the damage becomes too great?
Source: `Sway The Irresistible Pull of Irrational Behaviour` by Ori Brafman and Rom Brafman, 2008
Thanks Nicola de Corato for sharing this on his blog.
