Online Auctions: Smart Enough to Find Best Strategy; Dumb Enough to Play in the First Place

There are a whole lot of different ways for online merchants to make a profit these days. Overstock sites, wholesale sites, group discount sites and many others have been popping up for years.

One of the most popular forms is the auction site, which has expanded and proliferated greatly since Ebay took the stage a couple of decades ago. Besides other traditional auction sites, some have taken very different forms. For example, some sites have a countdown running and the last person to make a bid wins. The trick is that you have to pay for those bids, so it’s possible for you to spend money and get nothing. And then there’s the lowest unique bid model, the topic of a recent paper from Northwestern University.

In this type of auction, the person who made the lowest unique bid wins the item. So if you bid five cents , multiple people bid one, two, three and four cents, and nobody else bids five cents, then you get the item for five cents. But like the last-bid model, participants have to pay for every bid they make as well as the final winning value.

In the recent paper, Luis Amaral wanted to look at the strategies that people who use this type of auction site. He looked at 600 online auctions played by 10,000 different participants with a total of 200,000 individual bids. What he found is that people are just as smart as an albatross.

When an albatross hunts, it has the entire ocean to search through for lunch. So it picks a spot and focuses on fishing it a few times. If it doesn’t come up with a meal, it flies away somewhere else and concentrates on a new spot for a while. Mathematically speaking, this just so happens to be the best strategy possible.

Similarly, people in the online auctions placed a few bids around a certain number. If they didn’t have any luck hitting the lowest unique bid, they moved on to another numerical area to concentrate on. People intuitively used the best method.

And yet, they’re still insanely stupid.

You see, if everyone uses the same strategy, then nobody gains an advantage by using it, and the game becomes complete chance. In all of the 10,000 different participants, Amaral could not find a single person who did not adopt this strategy. Thus, it comes down to complete and utter random luck.

“At some point people will stop playing these online auctions,” Amaral said. “Humans are smart about recognizing the deck is stacked against them.”

Apparently, he’s never been to Vegas.

About bigkingken

A science writer dedicated to proving that the Big Ten - or the Committee on Institutional Cooperation, if you will - is more than athletics.
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