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SWAY: The irresistible pull of irrational behavior

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SWAY: The irresistible pull of irrational behavior

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The Twenty Dollar Bill Auction

Related article:
How to Auction off an Ordinary Twenty Dollar Bill for Fun and Profit

If you auctioned off a twenty dollar bill as I suggested – then good for you.  If you didn’t there is still time.  Do this with your friends.  This auction will elicit behavior and provide an insight into your friends personality that you can’t get any other way with such clarity.

The twenty dollar bill auction is cited in the book:

SWAY: the irresistible pull of irrational behavior by Ori Brrafman & Rom Brafman

According to the authors, the auction originates in a negotiations class at Harvard Business School.

The Three Phases of Bidding

According to the analysis there are three phases of the auction

1. The $2 phase. In this phase there is a good deal of optimism as the bidders see a real bargain.  When the bidding starts at $2 for a twenty dollar bill, this looks like a great deal.  This is the start of the entrapment into the momentum and logic of the auction.

2. The $12-$16 phase. This is where the bidders get an idea of where this auction is heading.  This is also where a consideration of loss sets in.  If one bidder bids $16 and another bids $17 then the $16 bidder has to bid $18 in order not to lose $16.  If the $16 bidder does not bid $18 then the $16 bidder will look like a sucker for paying $16 for nothing (see the bidding rules in our previous posting).

3. The $20+ phase. At this phase it’s all about loss.  No matter who wins the bid for the $20 bill both the highest bidder and the second highest bidder will suffer a loss. The contest is now about the reduction of loss.   As time goes on for the two bidders, it is no longer about winning – it’s about continuing your bidding to reduce the loss which only gets bigger and bigger as time goes on.

Irrational behavior – The convergence of loss aversion and commitment

There are two forces that feed off each other when the bidding gets over $20.  First, is a commitment not to lose and second is the momentum of what is going on.

The two forces, in turn, feed off each other: commitment to a chosen path inspires additional bids, driving the price up, making the potential loss loom even larger.

Of course, the rational action to take when the bidding gets to the $12-$16 level is to accept you losses and exit.  But this is generally not what happens when the auction is carried out.  Ori and Rom Brafman use this latter case as an example of irrational behavior.

In the book SWAY, the Twenty Dollar Auction is used to explain two historical events.  The first is the action of  President Lyndon B Johnson and  the Vietnam War and the second is George W Bush and the War in Iraq.

But in just a few years later LBJ was already deep into the third stage of the auction.  With more than 500,000 troops on the ground in 1968 and tens of thousands dead, LBJ was long past the $20 mark.  He lamented, “Light at the end of the tunnel, hell, we don’t even have a tunnel; we don’t know where the tunnel is.”… the president was getting beat but could not bring himself to change course.

In the end, Johnson lost more than Vietnam.  The war cost him the full realization of the Great Society, his approval ratings, and ultimately – when he decided not to run for another presidential term – his political career.

LBJ and Bush share this combination of commitment, and unusual optimism is the face of tremendous loss.

Both presidents showed strong commitment and resolve to stay the course.  LBJ stated “We will not be defeated.  We will not grow tired.  We will not withdraw, either openly or under a cloak of a meaningless agreement.”  President Bush asserted, “We will not fail.  We will persevere and defeat this enemy and hold hard-won ground for the realm of liberty.”

Conclusion

At a micro level the Twenty Dollar Auction is a fun game to play.  At a macro level, the Twenty Dollar Bill Auction played at the level of international politics affects millions of people.  But at both levels, whether you are just a regular person or the President of the United States people are swayed into irrational behavior.  That is the point of book by Ori Brafman and Ron Brafman.

Someplace in the middle of individuals and international politics companies and organizations are swayed into irrational behavior at the convergence of the momentum of what is going on and the ever growing commitment not to lose despite the evidence that the loss continues to grow.  The game is changed from a game played to win to a game played not to lose amid a sort of delusion of optimism – staying the course no matter what the loss.  Watch this blog for some examples of  how this irrational behavior is played out in organizations.

Here is yet another pitch, try the twenty dollar auction with your friends.  At the $12-$16 point, you might know more about the psychology of your friends than they know about themselves.

References:

SWAY: the irresistible pull of irrational behavior by Ori Brrafman & Rom Brafman

How to Auction off an Ordinary Twenty Dollar Bill for Fun and Profit

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Written by frrl

June 27, 2009 at 4:01 pm

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