Ben: Liz, I want to open with clickbait.
Elizabeth: Oh, are you gonna tell me how to live better?
Ben: Yes, there’s one simple trick. People bid wrong on eBay, and we’re going to show you the right way.
Elizabeth: Wait, what’s wrong with the way that people bid on eBay?
Ben: Well, they bid as if it’s a first price auction, but it’s actually a second price auction.
Elizabeth: Well, I guess we better talk about that here on
Both: Pod, Paper, Scissors.
[Opening theme: You gotta make decisions. Will you coöperate or defect?]
Ben: So last time, we talked about the Winner’s Curse.
Elizabeth: Right, that’s where when people win an auction, they feel regret because they overpaid?
Ben: Yeah, if they knew what other people were bidding, they would find out that they were the highest bidder because they were overconfident or whatever reason. And basically, finding out that you’re the high bidder means that you had over-optimistic information. That’s pretty bad for eBay, because what if every time somebody won an auction on eBay, they were like, “Oh, I regret that.” That’s not how you run a business.
Elizabeth: Okay, but what’s different about eBay auctions as opposed to a regular auction, is that if someone comes in with $15, and you bid $20, then you get it at 15.
Ben: Yeah, exactly. You pay the second price in the auction. And people expect that it’s a first price auction where you bid 20, you pay 20. That’s kind of what we’re used to, you know, in most of the world. They had a lot of trouble explaining to people that it’s a second price auction. Early on, they had this thing about “bidding elves”, which I initially misread to be bidding Elvises. But the idea was that you put in a maximum bid of I guess in Liz’s example, $20. And then the bidding elves come in, and if somebody puts in a bit of like, $10, then they raise your bid up to $11. And somebody else comes in and bids 15, the bidding Elvis comes in and raises until you’re at 16. So they came up with this imaginary bidding Elvis who turns it into a first price auction, like with this sort of proxy of somebody else. Does that make sense? Because I didn’t think it made sense when eBay described it either.
Elizabeth: Well, back in the 90s, everything on the Internet was magical.
Ben: Yeah, it was all elves, wasn’t it?
Elizabeth: I mean, who even were the w, w, ws?
Ben: We’ll never know. But yeah, the the basic idea is that you are not putting in the bid of what you want to pay. You’re putting in your maximum bid.
Elizabeth: Yeah, and if you bid 20, and you end up getting it for 16, you might feel pretty good about yourself, because you in some sense saved $4.
Ben: Yeah, you feel better. And this has happened to me. I’ve bought a good amount of junk on eBay. I think I was an early adopter, like in the early Oh Oh’s I had an account.
Elizabeth: In the naughty aughties.
Ben: Yeah, back in the day, back when the Internet was cool.
Elizabeth: Yeah. Well, I think in the late 90s, when I was a teenager, I started bidding on Broadway paraphernalia, because I was really into Phantom of the Opera. Les Miz and Rent, I guess
Ben: You had to fill time before Hamilton came out.
Elizabeth: Exactly. So many years before my beloved Lin Manuel came up with his idea. Anyway, I think I overbid on a snowglobe, a Phantom of the Opera that played one of the songs, because I figured that no one else would come in, and that I was gonna get it really cheap. But then like somebody else did come in, and it ended up raising the price beyond what I wanted.
Ben: The joy of the second price auction is that you don’t have to worry about making the mistake that Liz just made.
Elizabeth: Yeah, I mean, to be fair, I was a teenager and eBay was very new.
Ben: If you were doing a first price auction, yeah, you’d have to play this sort of, “I’m thinking what they’re thinking what they’re thinking” kind of game, right? If you want to bid, you have to think about what other people are bidding.
Elizabeth: Yeah, but even on eBay, you have to think about like if somebody’s gonna swoop in higher than your bid,
Ben: okay, what what was the snowglobe worth to you?
Elizabeth: I would say $20.
Ben: $20. Okay, so if somebody swooped in and wound up paying $21 for it, you didn’t want it. There’s no reason to bid higher than what you really want to pay for it. Because then you just wind up paying too much. So do you think there’d be reasons why you want to bid lower than what you—like you said it was worth $20? Are there reasons why you would want to bid lower?
Elizabeth: Yeah, I guess if I put in my maximum bid of 18, and somebody bought it at 19, I would feel bad.
Ben: So it sounds like the optimal strategy is for you to just sit down, think about what what the thing is worth, and just set that as your max bid. If you bid above, you might regret because you might win it and then pay too much. If you bid below, you might regret because you might miss out on something that you know, was still worth the cost.
Elizabeth: I guess so. These things are really tricky, because sometimes you find one of a kind items on eBay. Like maybe your favorite stuffed animal as a kid is being sold now. And you don’t have it anymore. Because Fluffy the Bear? Well, he was stained by some Manischewitz grape juice. [laughs]
Ben: I can’t tell if it the actually happened or not. [Liz keeps laughing] Okay, okay. But But,
Elizabeth: But what if there were a Fluffy the bear who was stained by Manischewitz grape juice, you have to throw him out. And then 25 years later, you see the exact same Fluffy the Bear on eBay is now a collector’s item, which some people are selling— [Liz is still laughing]
Ben: Okay, I’m still gonna be the hyper rational one here. And say that you should be able to sit down on the floor, just cross your legs, close your eyes, and work out what Fluffy the Bear is worth to you. And it could be 1000 bucks, or whatever, but whatever it’s worth, that’s your bid. You don’t have to think about well, if nobody else shows up, and you know, everyone else only bids 100, I’d want to bid 101 blah, blah, blah, right? Because the bidding Elvis will come in and raise your bid to exactly 101 anyway.
Elizabeth: Well, what if I get really—[Liz continues to laugh]
Ben: Second price auctions are hilarious. I hope you in radio land are having as much fun as Liz is with second price auction. Anyway, Liz was about to ask, what happens if you just get really competitive and you just really want to win? [Liz: laughing] Okay, okay, she’s gonna keep doing that. But yeah, that’s a good question, Liz. What if you just get really competitive, and it’s clearly the case that eBay wants you to. And you know, as you go through the bidding process, you’ll really see a lot of efforts that eBay makes to get you to not treat it like a second price auction. You put in a bid, and then it immediately tells you “do you want to increase your maximum bid, you can do that”, which as we just noted, is not the right strategy. The right strategy is to think about it, work out what you want to pay for it, type it in and walk away. But yeah, they want to make it exciting. [Liz: laughs] I can keep doing this.
Elizabeth: But then what if I get bit by the biddin’ bug?
Ben: [Ben laughs] That’s good. That’s good. I like it.
Elizabeth: If I get bit by the biddin’ bug, and I just can’t stop bidding.
Ben: They want that to happen, right? They want you to get emotional. And you know, it’s sort of funny, because first, the people who set up the auction site came up with this nice, simple method of second price auction. Sit down, think about what you want, type in the number, walk away. And then they add all these bells and whistles that make you want to win that give you the biddin’ bug. I don’t know, it’s kind of funny. It doesn’t change the correct strategy. I guess you can decide what losing costs, is worth to you. There has to be some number.
Elizabeth: Well, I also remember losing some auctions, because I thought that I was going to be the highest bidder. But then it said that there was less than a minute left. And when I checked to make sure that I had won actually somebody else had come in during that last minute.
Ben: The bid sniper.
Liz: Dum dum dummmm.
Ben: Yeah, this is still a phenomenon. I have to fact check whether it’s still exists, but there at least used to be a site that you type in the auction info and your your bid, and they will snipe for you. They will put in your bid in the last second.
Elizabeth: Really Ben, that really just sounds like a business from the early aughts.
Ben: Yeah, maybe it is. But people still do this stuff, right? It I guess you’ve seen it. I’ve seen it too. It’s sort of funny that the excitement really builds in that way. There’s an easy explanation for this, which is: those people didn’t get it. Those people think that it’s a first price auction, and they bid and then you bid $1 over what they bid and then they bid $1 over what you bid and so on and so forth. And if they think that it’s a first price auction, then yeah, they’re doing the right thing, according to what they think is the right thing.
Elizabeth: Okay, well, that sounds kind of mean, but maybe I should be trying to swoop in in the last minute.
Ben: Yeah. Because that makes sense. If there’s one person who doesn’t get it, and every time you bid is going to come in and bid a little bit more, then yeah you don’t want to encourage that person, perhaps the right thing to do with one person anywhere in the system doesn’t get it used to bid as late as possible. But the right bid, when you bid as late as possible, is: your evaluation. Having somebody in there who doesn’t get what’s going on, it doesn’t change the correct strategy in the end, but it does change the timing. I think that’s pretty cool, Game Theory-wise.
Elizabeth: So it just takes one person who doesn’t get it.
Ben: Yeah. And this is sort of an example of how some of these game theoretic games can be kind of fragile, IRL.
Elizabeth: Do we think that these other bidders who, who jack up your price, do we think that they’re real? Do we trust eBay to not inject fake bidders?
Ben: Yeah, that’s one sort of interesting feature of a second price auction, is—With a first price auction, if I say, I’m going to bid $60, and I win, and I pay $60, then all I need to know about the other people is that nobody bid higher. But if with a second price auction, I need to trust that the second price I pay is actually the price I’m frickin’ paying. Next time, we’re going to bring in a real estate agent, and he’s going to talk about second price auctions in home buying. And so there, we’re not talking about $30 cookie jars, we’re talking about, you know, half million dollar homes. So yeah, I really need proof that whoever, whoever’s price I’m paying is an actual person and not just kind of made up.
Elizabeth: I guess it’s kind of different than the Dragon*Con art auction.
Ben: Wait, what happens in the Dragon*Con art auction?
Elizabeth: Well, people can exhibit at Dragon*Con, which is a convention of nerds in Atlanta. And they have amazing artists, really all kinds of beautiful collages and drawings and paintings often kind of fantasy themed. And next to each one is a little index card. And so you write your name and what you bid, and it’s literally an index card. So you see the names and the prices of other people. So you can put in your bid in the morning. And then by 2pm, you can see if you’ve been outbid. And if you have—
Ben: meanwhile, you have the full history of—
Elizabeth: Yeah, you have the full history right there on the index card. So in theory, you could just add $1, at the very last minute to whatever is the last price.
Ben: So it sounds like here, you should, again, you want to hide your information from other people by showing up as late as possible and putting in your bid, right at the end.
Elizabeth: It’s true. And I guess I’ve never really participated in this, but I might imagine that if everybody were following our advice, there would be a mad rush in the last 30 seconds of the auction.
Ben: I think that actually happens. I am more boring than Liz. So I recall this index card auction happening at the Johns Hopkins library when they were selling off their furniture.
Elizabeth: Is that where your blue chair came from, Ben.
Ben: Yeah, yeah. Liz has been to the Partisan and has seen what I call the—
Elizabeth: people don’t know what The Partisan is.
Ben: Oh, yeah. Last episode, we introduced my house, The Partisan, because it leans. Up in the library I have the Hopkins Chair of library studies, which I got at that auction, I think it was like 30 bucks or something. And it’s a really good chair.
Elizabeth: Wait, it wasn’t free.
Ben: People listening on the podcast can’t see me glaring. And I actually came in at the end of the auction, and it was really crowded. There were a lot of people standing around putting in their bids. But yeah, we should wrap up. So in conclusion, there’s a lot that goes into auction design. We’re all very used to this sort of first price auction. Everybody comes in, “I’ll pay 10!” “I’ll pay 12!” But there are lots of other different types of auctions out there.
Elizabeth: Like house buying.
Ben: Yeah, like house buying. So I guess we already briefly teased it next time. We’re going to talk to a real estate agent who has actually taught some things, taught seminars and things about second price auctions in the context of home buying.
Elizabeth: Oh cool. I’ve never bought a home.
Ben: So there’s our clickbait. I know Liz is a millennial, so—
Elizabeth: I pay my rent.
Ben: What’s that from?
Elizabeth: That’s from the Pet Shop Boys. Oh, fun fact. I learned about the Pet Shop Boys song “Rent”, because I was looking on eBay in 1997 for Rent paraphernalia, and I got a mixture of Rent playbills from Broadway and records from the Pet Shop Boys, which years later I would come to like very much. But at the time, I was like, "Who the hell are these people? Why do they have pets in their shop, and they have to rent it?
Oh man, while we’re digressing like crazy, like, let me tell you like a thing I’ve been doing on eBay lately, which I recommend to the listeners out there. I just go to eBay and I come up with like the first word that pops into my head, and I type it in. And it’s just amazing. Any word you come up with, you know, there’s junk associated, and it’s junk you totally didn’t expect it’s just fabulous to just go to eBay and type in “paleontology” or, you know, psychedelic…
Liz: Door knobs?
Ben: Psychedelic doorknobs. Something turns up and it’s like, wow, somebody made that and sold it. And I don’t understand Capitalism now.
Elizabeth: What a great pandemic Saturday activity.
Ben: I’m Ben Klemens.
Elizabeth: I’m Liz Landau, and this is Pod, Paper, Scissors.