"The Irrational Auction"

Five years ago I was part of an assessment that gave me the opportunity to learn more about my strengths and areas for improvement as a Leader. It was a full day session that included online tests and 'in-basket' scenarios to simulate how I might react during various business related activities. It was incredibly insightful and validated much of what I knew about myself. Positives - high on change agility and innovation, Negatives - may have tendencies to act on impulse or react with emotion when I make decisions. Certainly not surprising for my colleagues.

Making decisions based on emotion (or ego) instead of rational facts can be dangerous - as leaders, we make decisions every day so it's important to recognize when our decisions may be putting the business at risk.

This reminded me of the story of the 'Irrational Auction'. The exact origin of the story is somewhat unclear, but it appears to have been created by Martin Shubik and colleagues at RAND and Princeton in 1950. In their free time, Martin and his friends developed odd and unusual games to play at parties - this was one of their most creative discoveries. The game itself is essentially an auction for a $20 dollar bill - seems straight forward? Not quite...

The catch lies in the rules for the auction;

Rule 1: (As in any auction) The $20 bill goes to the highest bidder, who pays whatever the high bid happened to be. Each new bid has to be higher than the current highest bid, and the game ends when there is no new bid within a specified time limit. i.e. If you were the highest bidder at $18 - congrats, you've won the $20 bill!

However;

Rule 2: The second-highest bidder also has to pay the amount of his last bid – and gets nothing in return. Certainly not a desirable outcome for the bidder!

So essentially, if the auctioneer can convince two individuals to bid over $10 he would make a profit!

Now, the reader may be wondering why would anyone pay more than $20 for a $20 dollar bill? The answer is simple - because we are human - and sometimes humans act irrationally, especially when our egos and emotion are involved.

Once the bidding reaches ten or 11 dollars there are usually only two bidders left in the auction. When the bidding reaches $20, the second highest bidder is usually too emotionally invested to quit, despite the fact that to continue is completely irrational. The result is that the only winner is the Auctioneer -who is enjoying the game, smiling ear-to-ear, and planning his next trip to the local electronics shop to spend his winnings on a new iPod.

Another interesting observation is the impact that the 'crowd' has on the two remaining bidders. The crowd tends to encourage the bidding to continue, such as "Don't let him win, Joe!" or "You can beat him, Frank!". The bidders are running on adrenaline and push the envelope, bidding values well above the $20 dollar value of the prize. It's also interesting that the names usually quoted in the previous example are male - this is not by accident! Believe it or not, the men in the crowd are usually the ones that have a more difficult time backing down from the perceived 'fight' of the auction, and are also more impacted by the crowd effect.

Surprising, eh?! Not really - women tend to be able to act more rationally once the bidding increases beyond reasonable values. Usually they start shaking their heads and laughing at around the $10 dollar mark. Having said that...the embarrassment of losing in front of our co-workers/friends is worth the extra dollar or two...right?

So what lessons can we learn from this party game?

First - don't play the game. William Ury, author of "Getting Past No", talks about 'changing the game' when in a tough situation and individuals are playing on your tendency to act with emotion. In the auction above, as soon as you enter the game, you lose. Our job as a leader is to understand when these situations occur so we don't enter a game when we know that 'we' cannot win. However, if we happen to enter the game...

Second - get out early! No one enjoys to lose - it's not fun, but in some cases we need to understand that continuing to play the game is irrational - and sometimes just plain dumb! Summon your female intuition! Everyone makes mistakes - if you're not making mistakes then you're most likely not improving. The best teacher is your last mistake! Treat it as a learning moment and cut your losses. If you don't happen to get out early...

Third - don't be the 'crowd'. It's easy to watch the train rumble down the track towards the ravine. Help and support your colleagues when they are acting with emotion and making decisions irrationally. Help them 'exit' the game - they're too concentrated on crashing to realize that they need to jump off! 

Even though the rules are known and everyone immediately recognizes the risk before they enter the game, there are still many that enter nonetheless. Perhaps it's not knowing where to exit - there is no hard line drawn. I guarantee that most of you deal with the 'Irrational auction' on a daily basis. In some cases we're the bidders, in other cases we happen to be the auctioneer or the crowd.

We can apply the lessons learned to many other aspects of life, not just in business or leadership. Investing and relationships are two good examples. Have you ever kept an investment in just a little too long? Have you ever stayed in a relationship too long - even though it may have been irrational?! Never confuse our ego with being passionate - your ego can serve you well, but it could be used to serve the Dark Side!

I'd love to hear your thoughts,

Jason

(note: the original game was for a $1.00 - I accounted for inflation!).