ArticlesIn 1991, I first heard of the idea of auctioning off a $20 note with the special proviso that both the winner and second-place getter must pay for their bids.
Thirty seconds of thought will tell you that – once you start bidding, you can’t stop. But thirty seconds is far more thought than many people are willing to give before making a bid. Hilarity and profits ensue.
Professor Max Bazerman conducted this experiment on his students.
Over the past seven years, Bazerman said, he has conducted about 180 such auctions, and over that period his take has been less than the full $20 only once. Seven times he has cleared $100.
[Note: This was quote was dated 1994.]
Today, I had a new insight into a way of beating this system – one which might have accounted for him receiving less than $20 on that one occasion.
Remembering that the minimum bid increment is 50 cents, if you have the good fortune of bidding first, bid $19.51. No rational person will want to be the second bidder, and pay $20.01 for $20.00. Meanwhile, you are clearing 49 cents of pure profit.
Meanwhile, that raises an accounting puzzle: How do you declare this profit on your tax return? How can you declare a capital gain when there is a purchase date and a cost base, but no sale date?
Comment by Alastair on September 19, 2005
What makes you think the $0.49 is a capital gain? Sounds like income to me, but of course IANAA.
Comment by Sunny Kalsi on September 20, 2005
You know, I read that and I thought $19.51 as well…
are people stupid, or just not as sadistic as I am?
Comment by Sunny Kalsi on September 20, 2005
Having said that, it’s a lot less painful to swindle someone out of 49 cents than someone else out of ~$19.
Maybe I just have a strong sense of justice.
Comment by Julian on September 20, 2005
Alastair,
If I buy a Roman Denari (Denarus?) for $19.51 and sold it later for a $20, that counts as a capital gain.
Should it make a difference if I collect modern currency instead of ancient coins?
Perhaps the solution to my problem is to go into a bank and get the $20 note changed into two $10 notes, and declare that I sold it for $20!
Sunny,
Given it took me 14 years to come to this realisation, I would like to think it is not stupidity to miss this subtlety. The only other choice you leave me is sadistic, but it seems to me the closest person to that definition is the professor who kept repeating this experiment on poor students!
Your strong sense of justice left me confused, I am afraid. Under what circumstances is anyone being swindled out of “~$19”?
Comment by Alastair on September 21, 2005
The analogy that I was thinking of was something like this:
You will provide me with an entertainment service. I will in turn pay you $0.49. Got change for a $20?
Comment by Alan Green on October 6, 2005
Seriously, I’d bid $20.01. It might cost me $0.01, but that’s a small price to pay to see the look on the loser’s face. 🙂
Comment by Julian on October 6, 2005
Alan writes:
That would be the risk I would be taking – that one of the other bidders isn’t playing by pure economically rational rules. Still, it would be worth it for the look on your face, when I overbid you to $20.51.
Hmmm…
Comment by Sunny Kalsi on October 11, 2005
Julian,
Sorry, I’ve gotten a new impression of this. I read your “C magic trick” question and I really got tricked. The funny thing was, had you not had all the “flashy extras” like comments from other languages and other things, I probably would’ve picked it quite easily. The claim that this was “magic” and esoteric symbols had me distracted. Here, you weren’t trying to trick anyone, you were trying to explain. Therefore, the 50c really stands out. The point here is that there was probably other motivation pushing you than solving this problem.
I think you both got my point with the “look on the loser’s face” as far as sadism and justice goes. With rational players, the $19.51 case is “just” in the sense that the guy trying to swindle you loses. Betting, say $19 is cruel, because someone else might say “$19.50” without thinking it through (they might also say “$19.51”, in which case you say “touche” and drink a sip of wine, promptly spitting it out). Then you can say $20. If everyone is sadistic but rational, this is the way things would go, because you don’t lose, but someone else is swindled out of $19.50.