The magic of auctions

In many auctions, the most irrational person wins.

Here's the proof: eBay offers a service where you can enter your maximum bid. Say you're bidding on a signed Derek Jeter baseball bat. You decide that the most you'd ever be willing to pay for this bat, under any circumstances, is $99. Type it in.

The auction may be at only $15, and eBay will automatically bid $16 for you. If someone else outbids you, eBay keeps increasing your bid automatically, but never exceeds your maximum.

A rational purchaser sees this as a no-lose proposition. If no one else bids more than $80, you get it for much less than you were prepared to pay. If someone else is willing to bid $100, you lose, but that's okay, because you determined ahead of time that it was only worth $99. If it goes for a hundred bucks, no big deal... it's like seeing a diamond ring for a million dollars. You'd like it but you're not willing to pay for it.

The price someone in Texas is willing to pay shouldn't have anything to do with what you think something is worth, should it?

The thing is, very few people who win auctions on eBay use this feature. It's human nature to want to keep what you've got, to want to avoid losing. Even a ten-year-old gets incensed when he discovers he's been outbid.

That's why so many auctions are active at the last minute. Auctions don't work in a rational way.

When you bid $16 for that bat on the first day, you feel terrific. I mean, you just bough a $99 bat for $16.

Of course, you're only the high bidder for a day or so. Then it's not your bat anymore! Someone else has your bat. So you bid $4 more. It's okay, you tell yourself, because, hey, you only spent $4 to get your bat back.

And this keeps going and going until you've spent $200.

A friend of mine spent almost a thousand dollars on a piece of furniture worth $20 using this tortured logic. Human beings are quite willing to repeatedly spend small amounts of money to avoid losing something that they think already belongs to them.

Last thought: the only thing worse than losing a big-time auction is winning one. If you win, you feel like a chump because everyone else in the world dropped out before you. Which is why, if you ever sell something big at auction, you need to bend over backwards to pleasantly surprise the purchaser. It's the only way to overcome auction-buyer's remorse.

Bonus lesson: If you can sell a trial version of the product or service you offer for a small amount of money, do it. (Not 'free', though, cause that'll ruin it). Once someone tries the trial--assuming they like it--then future purchases are easier to justify, because all they're doing is paying a bit extra to keep the item from disappearing...