Game theory explains why you're willing to pay more than a dollar for a dollar

The Dollar Auction shows us how people can become over-obsessed, lose large amounts needlessly, and make the ultimate irrational choice by doing the most rational thing at the time. See the edges of human denial and desparation, for only a dollar.

Martin Shubik, and American economist, invented a game, or more precisely a 'game,' that leads people to make deeply irrational choices by sprinkling breadcrumbs just in front of them. The game is simple. Two people bid on a dollar. Both surrender whatever amount they bid, but only the winner gets the dollar. How much would you bid?

To begin with, most people will bid a penny. Their competitor, seeing the spectre of 98 cents of profit, will bid two pennies. The first will bid three pennies, and on and on.

Eventually, the first player bids 99 cents, accepting a simple penny as payment for their effort. The second sees any hope of profit dissolving, but they do see a hope of breaking even. Only one penny more and they can walk away 'square.' They bid a dollar. The first player now has a choice; it's silly to bid over a dollar on a dollar. But it's even more silly to give up 99 cents. Paying a little more minimizes their loss. In the end, both will bid far more than a dollar, putting them in debt, in the hope of making the smallest loss.

The Dollar Auction is a simple game that illustrates a deeper human desire. Anything costs effort. The more effort put into it, the more intolerable it is to walk away. When Ahab goes after the White Whale, or Darth Vader comes close to watching his own son fry, or anyone sends another few thousand dollars to an exiled Nigerian prince, well, anything is better than admitting that you lost to a rigged game and have nothing to show for it.

Of course, the only person you really want to be in this type of game is the Auctioneer.

Via JStor.