The "Dollar Auction" In Iraq

Economics professors have a standard game they use to demonstrate to their students how apparently rational decisions can create a disastrous result which they call a "dollar auction." As you read on, keep the whole Iraqi war debacle in mind.

Here is how the "dollar auction" works: a dollar is offered for sale to the highest bidder, with only one wrinkle - the second-highest bidder has to pay up on their losing bid as well.

Initially, almost every student gets sucked in. The first bids a penny, looking to make 99 cents. The second bids 2 cents, the third 3 cents, and so on, each feeling they have a chance at something good on the cheap. The early stages are fun, and the bidders wonder what possessed the professor to be willing to lose some money.

The problem surfaces when the bidders get up close to a dollar. After 99 cents the last vestige of profitability disappears. The highest bidders now realize that they stand to lose no matter what, but that they can still buffer their losses by winning the dollar. They just have to outlast the other player.

If this strategy is followed, the highest bidders usually run the bid up several dollars, turning the apparent shot at easy money into a ghastly battle of spiraling disaster. Just like the war in Iraq. Hmmm. Has anyone in the current administration taken Econ 101?

This isn't my original thought: Oliver R. Goodenough wrote about the dollar aution in the Rutland Herald, but I liked it so much that I thought I should share it with y'all.

Via Neu