I don’t know if any readers know Jay Leonhart, but his “Sometimes I Think” from Salamander Pie is my theme song. I cannot relate to a lot of behavior considered normal. So I hate to personalize this discussion, but the subject of this post involves one of those areas of human activity I find to be a complete mystery.
Start with shopping, or more accurately, the idea of shopping as an enjoyable leisure activity. I detest shopping, it’s an utter waste of time. Any effort expended on shopping would be better spent on something worthwhile, say a nap, a good book or a movie. But faced with purchases beyond the trivial, I will take the trouble to make sure I am getting something that has the functionality I want/need and I am not overpaying. One side effect of my distaste for shopping is that I use computers longer than anyone I know (I soup up the memory until ever-escalating demands render them so hopelessly underpowered as to be untenable. I was very happy with my NeXT, which was my workhorse for 10 and a half years, and the laptop I am using now is over seven years old and sadly is probably due to be retired soon).
Now that isn’t to say that I don’t like buying nice things, but the effort required to locate said “thing” is generally an annoyance. John Kenneth Galbraith was right when he said consumption takes effort.
So today’s object lesson on behaviors I find incomprehensible is Swapoo, described by Richard Thaler in today’s New York Times as a clever example of a website that preys on cognitive biases. Thaler first gives the background:
If a business school professor is running short on cash, there is a sure-fire solution: run a dollar auction game in class.
To start, the professor offers to sell the class a $20 bill. Bidding starts at $1 and goes up in $1 increments. The winner pays the professor whatever the high bid was, and gets the $20. Here’s the catch: the second-highest bidder also has to pay, but gets nothing in return.
Typically, a few brave or stupid students — nearly always male — open the bidding but fairly quickly only two bidders remain and they discover they are in a war of attrition. The bidding slows when someone bids $20, but then resumes with neither wanting to “lose.” If the two students are particularly stubborn, prices can go over $50. (The professor typically gives the money to charity, or claims to.)
The dollar auction game was invented by a pioneer of game theory, Martin Shubik of Yale, and it illustrates the concept of “escalation of commitment.” Once people are trapped into playing, they have a hard time stopping. (Consider Vietnam.) The higher the bidding goes, and the more each bidder has invested, the harder it is to say “uncle.” The best advice you can give anyone invited to play this particular game is to decline.
Yves here. I’ve never been a fan of auctions, or more accurately, live auctions. Perhaps some readers are more cold blooded, but I notice how my pulse rises when an item I am interested in goes under the hammer, and am annoyed that the process is triggering that response. I have found that more than once I violated my pre-planned limit as to how high I would go. As I result, when I do bid at auction (not often, mind you, this is hardly a routine activity), I only submit bids in advance (or on eBay, at the very close if the price has not exceeded my limit. But the fact that I have to monitor an eBay auction to see if I want to lob an last-minute bid is another “shopping” time sink).
But some people clearly enjoy this sort of thing a great deal. Back to Thaler:
Swoopo sells new merchandise using unusual auction formats. Let’s concentrate on one of them, the so-called penny auction.
Typically an item — say, a laptop that retails for $1,500, is offered for sale. The bidding starts at a penny, and goes up in one-cent increments, but it costs bidders 60 cents to make a bid. Each auction has a scheduled closing time, but as the deadline nears, that time is extended by 20 seconds whenever someone bids.
The site’s home page displays several attractive objects for sale with closing times fast approaching. It is mesmerizing.
One winning strategy might seem to be this: Bid at the last second, just before an auction is about to end. To “help” you do so, the site offers an automatic bidding program called a Bid Butler that allows you to make bids in the last 10 seconds. Alas, others can also use this automatic program, and you soon discover that just as the clock is ticking down and you’re about to make your big score, a bunch of other Bid Butlers get busy, the price jumps by a few cents, and the clock adds more time. Items can remain “in their final seconds” for days.
Yves here. Do any of you find this procedure acceptable? Yes, it’s disclosed, but this is no different than the “gotcha” fine print in credit card agreements; in fact, it’s core to the economics of this service. This reminds me of one description of lotteries: “a tax on people that are bad at math.” Back to Thaler:
What makes this procedure so devilish is that while bidders are looking at what seem to be amazing bargains, the Web site is raking in the money. Because Swoopo collects 60 cents for each penny bid, its revenue is the selling price multiplied by 60. This means that if a computer you covet sells for $100, seemingly a bargain, Swoopo collects $6,000 in revenue, a very juicy profit.
Swoopo has even sold cash using this format — specifically, checks for $1,000. My colleague Emir Kamenica and I looked at 26 such auctions we found in a data set posted on the Swoopo Web site. For each of these, the average revenue to Swoopo was $2,452. Winning bidders also did well: Of the winners, all but two made money even after accounting for the cost of their bids, with an average profit of $658. Still, the important point to remember is that, collectively, bidders are losing money. Only the lucky last bidder is a winner….
AND some lucky bidders do get bargains. The site’s list of completed auctions includes a laptop that sold for $23.27, a video game for $5.88 and a microwave oven for $60.96, prices that don’t include bidding fees.
How much danger does Swoopo pose to consumers? Your view of that may depend partly on whether you think people are playing for fun or merchandise. If they are looking for the thrill of chance, it’s hard to argue that Swoopo.com doesn’t have as much right to life as slot machines or state lotteries.
But if people are looking for a good deal, the right comparison isn’t to gambling, but to a discount retailer. The difference between Swoopo and Best Buy is that at Swoopo you end up paying for stuff in the other guy’s shopping cart.
Now I imagine that a few hardy souls will contend that they have highly optimized strategies, or have just been lucky, and they think Swoopo is just dandy. But this looks like the sort of business P.T. Barnum would love.