Latest / Behavioral Economics with Fexingo: Decision Making, Bias, and How People Really Spend / Why Your Brain Treats an Auction as a Gamble
Transcript
- Lucas: If you have ever won an auction on eBay, there's a decent chance you felt a small surge of triumph followed by a quieter thought: 'Wait, did I just pay too much?' Luna: I have definitely been there. I once bid on a vintage Leica camera, got into a last-minute back and forth, and ended up paying about forty percent more than I had told myself I would spend. Lucas: That feeling has a name in economics: the winner's curse. It is the tendency for the winning bidder in an auction to overpay, often by a significant margin, because they had to outbid everyone else to win. Luna: And it is not just vintage cameras. The winner's curse shows up in oil drilling rights, IPO allocations, even professional sports free agency. Lucas: Right. But what I find fascinating is not just that people overpay, it is that our brains treat the auction itself like a gamble. The act of bidding triggers the same dopamine pathways you see in slot machine play. Luna: So you are saying the auction mechanism is almost designed to hijack our reward system? Lucas: Exactly. There was a study from the University of Chicago in 2024 that tracked physiological responses during online auctions. Participants showed elevated heart rate and pupil dilation during the final ten seconds of bidding—similar to what you would see in someone playing a slot machine. Luna: Wow. So the thrill of potentially winning overrides the rational calculation of value. Lucas: And it gets worse. Once you have placed a bid, you have already invested psychologically. That investment triggers loss aversion: if you lose the auction, you 'lose' the time and emotional energy you put in. So you bid higher to avoid that loss, even if the rational move is to walk away. Luna: That is the sunk cost fallacy meets competitive pressure. I remember reading that eBay's data shows winning bidders pay on average thirty percent above their pre-auction maximum when they get caught in a bidding war. Lucas: And that thirty percent is a conservative average. In auctions with very short countdowns, the overpayment can spike over fifty percent. The time pressure literally prevents your prefrontal cortex from stepping in and saying 'this is a bad deal.' Luna: It makes you wonder: is there any way to bid rationally? Or are we just wired to get caught up? Lucas: There are strategies. One is to set a hard maximum before the auction starts and use automated bidding software so you never see the emotional back and forth. Another is to reframe the goal: instead of 'win the auction,' think 'get the item at a price I am happy with.' Luna: But even knowing that, I still feel the pull. There is something about seeing the timer tick down and someone else's bid appear that makes me want to click 'bid' one more time. Lucas: That is exactly why auction houses and online platforms design the interface the way they do. The countdown, the competing bids displayed in real time, even the color of the 'bid now' button—all of it is engineered to keep you engaged and bidding. Luna: So it is not just a marketplace, it is a behavioral lab. Lucas: And a profitable one. A 2023 paper in the Journal of Marketing Research estimated that auction-style listings generate roughly eighteen percent higher revenue on average than fixed-price listings for the same items, precisely because of the psychological dynamics we're describing. Luna: That is a big gap. And it explains why platforms like eBay still use auctions even though most e-commerce has moved to fixed prices. Lucas: Auctions are not just for collectibles anymore either. You see them in real estate bidding wars, which are essentially sealed-bid or escalating-bid auctions. And in M&A, the whole process of a contested takeover is effectively an auction where the winner's curse can cost shareholders billions. Luna: Right, the classic example is the 2006 bidding war for Arcelor between Mittal Steel and Severstal. Mittal ended up paying a huge premium, and analysts argued they would have been better off walking away. Lucas: And that is the paradox: winning the auction can sometimes be the worst outcome. The winner's curse means the victory itself is a signal that you overestimated the value relative to everyone else. Luna: So the question becomes: how do you protect yourself from your own brain in these situations? Lucas: One technique is called 'pre-mortem bidding.' Before the auction starts, imagine it is over and you lost—how do you feel? Usually, you feel fine. Then imagine you won but paid too much—that stings. That mental contrast helps anchor your maximum bid before the emotional heat kicks in. Luna: I like that. Another thing I have heard is to focus on the item's replacement cost, not its scarcity or sentimental value. Lucas: Exactly. Because once you frame the auction as a game of value rather than a game of winning, you start to see the irrationality more clearly. But it takes practice, because the auction format is really powerful at hijacking our attention. Luna: And the more competitive the auction, the more intense the hijacking. I wonder if there is a way to design auctions that nudge people toward more rational bidding. Lucas: Some platforms are experimenting. For example, eBay now offers a 'buy it now' option on most auction listings, which gives you an escape hatch. And some real estate agents are moving to transparent escalating bids rather than blind bidding, because blind bidding tends to amplify the winner's curse. Luna: That is interesting. Transparency might reduce the emotional poker game and shift focus back to actual value. Lucas: Right. But even with transparency, the fundamental psychological forces are still there: the thrill of competition, the fear of losing, the dopamine rush of a last-second bid. It is a hard combination to override. Luna: It really is. And you know, thinking about all this—how carefully these platforms design their interfaces to keep us bidding—it reminds me that understanding these biases is one of the most valuable things we can learn. A lot of listeners tell us that these episodes have changed how they approach their own spending. Lucas: That is great to hear. And honestly, the reason we can keep making these deep dives is because listeners who find value in them sometimes choose to chip in. We do not run ads on this show—it is entirely supported by a small group of people who contribute at buy me a coffee dot com slash fexingo. It is not a big ask; just a way for those who find it useful to keep it ad-free. Luna: Yeah, it is a pretty cool model. It means we can talk about whatever we find interesting without having to sell anything. Lucas: Exactly. And it lets us go deep into topics like this without worrying about keeping a sponsor happy. So if you have ever thought about supporting the show, that is the place to do it. And if not, no worries—we are glad you are here. Luna: Alright, back to auctions. So we have covered the winner's curse and the dopamine rush. But there is another layer: the endowment effect. Once you bid on an item, you start to feel ownership, and that makes you value it more. Lucas: Yes, that is a huge piece. The endowment effect means that after you place a bid, the item feels partially yours. Loss aversion then kicks in: if you lose the auction, you are not just losing a transaction, you are losing something you already owned psychologically. Luna: So the bid itself creates a sense of ownership. That is why people bid above their limit—they are trying to avoid the pain of losing something they already feel is theirs. Lucas: Precisely. And that psychological ownership can happen within seconds of placing that first bid. It is remarkably fast. That is why the best defense is often not to bid at all unless you are ready to walk away at a predetermined price. Luna: So maybe the real lesson is: if you want to avoid the winner's curse, treat auctions like a casino. Set a budget, stick to it, and never chase losses. Lucas: I think that is a fair analogy. Auctions are gambling with a veneer of rationality. The item is real, but the pricing process is driven by emotion and competition. Recognizing that is the first step to bidding smarter. Luna: I will try to remember that next time I see a vintage Leica on eBay. But no promises. Lucas: I think that is all any of us can do. Thanks for listening, and we will see you next time.