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.
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I made the mistake of trying to buy something in an auction from them. I’m glad it was only a $20 mistake. I think they make most of their money from people who sign up without paying much attention to the fine print.
$20 lost, lesson learned. Swoopo is a scam.
Oooh, that makes sense, that a lot of user are first timers who didn’t see their obscure per bid charges and get burned. But that would seem to be a self-limiting business model…
Yves said…But that would seem to be a self-limiting business model…
Skippy here..yep vacuum cleaner door to door stuff, RONCO et al todays sale is all that matters for tomorrow there is always another scam a new venue a desperate person looking to fill the hole left inside them selves my advertising.
Btw my eyes were opened in 7th grade by a newly minted teacher and her advertising class. The types of it and the reasons for it, from that day forth I was never the same (that was in the early 70s).
Skippy…every one knows that shopping malls are designed to increase blood pressure…right? Try putting on one of those blood pressure wrist devices and on friends too, give them a mission to find something for specific for 50 bucks (middle price range for that item) and watch their brains go at it…good times!
They could also try the experiment while Christmas shopping, but that might break the device.
I visited the swoopo website for the first time after reading your posting. It is not at all clear that there is full disclosure of the rules.
At the top of the frame showing the ongoing auctions, the site states “Bid now – these auctions are about to end.” Of course, as you point out, these auctions are not about to end; rather, they’re only about to end if no one else bids.
Thus the statement, prominently displayed on the website, is materially misleading because it contradicts the actual rule. That rule, presumably, is only disclosed in the fine print.
Let me state it this way: swoopo makes two contradictory statements, with the statement that is most prominently displayed being materially false and misleading.
I spent a few hours watching/researching swoopo a few months ago when the NYT first did an article on swooopo. Gambling by another name or a lottery for the dimwitted. Shopping is the last thing I would use to describe what that site promotes.
Why has the NYT done two articles on this site?
Make that 5 articles or blog entries concerning Swoopo by the NYT? Slim have a controlling interest in Swoopo?
I honestly wish that I had thought of it.
What a great idea.
Chalk it up as free education. After all the people playing Swoopo don’t have to pay a professor to rip them off.
Yves, it’s one thing for suckers to lose a few hundred bidding on stuff they don’t get, but that’s just the lottery writ large. (After all, what is a ticket or a bet if not a bid for the jackpot?)
Where it gets serious is in the macro area. Vietnam was mentioned, which brings Afghanistan to mind (but who is bidding against us?). Perhaps a better analogy would be the game of chicken between the US and China: will the US stop borrowing/consuming first, or will the Chinese stop lending/holding down their currency?
Perhaps you or some of your heavies (Richard Kline, your guest posters) will weigh in and provide equivalent less-then-zero-sum games going on in the various bailout programs.
I agree this may seem trivial in terms of consequences, but you have to understand what my real mission here is. Contrary to appearances, it is not to rail about finance, or attack hypocrisy in government, or go on about cognitive biases.
I am out to try to get people to think critically, to stand back and look at the phenomena they encounter (news, business practices, stuff in daily life) and be able to go into meta-mode: “Hey what is really going on here? Does this make any sense? Do I want to take part in it or unwittingly promote it?” Too often, people passively swallow what is served up to them.
And I also believe in zero tolerance. Bratton’s policing strategies in NYC proved that allowing minor instances of bad behavior to go unchecked set the stage for bigger ones.
Regarding your U.S./China trade comment, here is an interview with Warren Mosler, 2012 U. S. presidential candidate.
http://www.hardassetsinvestor.com/features-and-interviews/1852-warren-mosler-beware-of-budget-balancers.html?start=2
I believe he’s stating that there is no trade imbalance.
I agree that taking part in any of these bids is absolute foolishness. It’s a little like all the people in Reno thinking if they could just be a little smarter they would find the way to win big at the gambling tables. Of course all that being a little smarter would do is allow them to get to the meta level of realizing gambling is a losing proposition no matter how smart you are.
But I do have to admit I am fascinated by the game theory behind all this. Although the concept of “escalation of commitment” came later, it is very similar to much of the discussion in Thomas Schelling’s two classics Arms and Influence and The Strategy of Conflict. I can’t think of any other books that are so vital to understanding negotiations and international relations. But this is where the reference to Vietnam comes from in the NYT’s article since several policy makers at the time were rather unfortunately influenced by Schelling’s work in the early days of the Vietnam War to escalate. In his defence Schelling had warned them that if the bombing campaign didn’t work in three weeks that then it would never work. Sadly the policy makers didn’t take that advise on board.
Yves, we make most of our non-food purchases on the net.
Even if it costs a bit more sometimes, I can save anything from ten minutes to a couple of hours by going on to http://www.froogle.com [operated by Google.com], find a bunch of vendors, rank by price [delivered to my ZIP code], make the purchase and move on.
Anything from a couple of cans of wasp spray to multi-thousand dollar gear for the office.
Over the course of the year, froogle saves us a ton of time and money.
We’d way rather go hiking in the woods than trolling a mall or a superstore.
Yves – see http://www.jbidwatcher.com. Jbidwatcher (free) monitors your eBay auctions and will snipe a bid for you in the closing seconds. Works well.
What is unique about this is really only the fee to bid. Yahoo Auctions in Japan (ebay didn’t take off there) resets the time when an auction ends as new bids come in. Without the fee levied on bidders, it tends to lead to more consistent item pricing, since sniping goes from very low to randomly higher (whenever the auction ends). I actually like the system of delaying the end of an auction to prevent sniping as it makes bidding less, not more, stressful. I put in a bid for what I will pay maybe an hour before the end, and if someone outbids me, I have time to consider whether I’d like to make a higher bid. With the fee for bidding, it seems quite a bit sketchier.
I’ve not found bidding a particularly good way to a bargain.
To pay 60 cents to bid is asinine.
Generally, I don’t see why buyers go to auctions. In my limited experience, it’s a waste of time.
I went a few times to eBay 8+ years ago to search for a computer. What I found was that other bidders had bid up used computers to prices about as high as new, faster computers available at my usual discounter. My conclusion is: if you’re a shopper who already knows at least something about a particular market, don’t bother with a mass-market auction site because there you’ll bid against at least some shoppers who overvalue the item (or overvalue “winning”).
I much prefer Amazon, where a community of sellers underbid each other to provide the buyer with a good price.
(Or Craigslist, when you’re looking for items your neighbors are just trying to get rid of typically without a fuss and without an interest in maximizing profit.)
I agree that actual shops are now unbearably stressful and noisy.
I get a lot of things on ebay. I never bid in person – I use a sniping service. I’m afraid I don’t have references to hand, but some academic research shows automated sniping to be the best strategy for online auctions. It keeps me away from bidding wars and becoming excessively attached to an item or the idea of winning. Actually watching an auction stirs up too much adrenalin for me to think straight.
I use Auction Sniper, but I understand there are other services that are also very god.
good, not god
You have an intriguing blog.
I’ve noticed that the “thinking” right now on the business blogs is moving in the direction of “psychological root causes”. Nothing makes “sense”; most policies are so stupid that it is stunning; and the madness of insane government policy is now being described as surreal on some very good blogs (my favorite crazy idea: the idea of the FDIC borrowing money from bankrupt US banks to ensure deposits in bankrupt US banks. Epic.).
So, just this tidbit that I have found useful over the years : you get people addicted to gambling the same way that you teach dolphins to jump through hoops in a water park show (Google it. Tony Robbins also mentions it in passing in one of his books – I forget which one). If you can get them to start playing then you can keep them escalating.
For instance, there are really cheap bus tour weekends to casinos. They often have “penny slots”. Just one penny, sucker, and you’re ours. Go for it… If we can get you in the house, we can get you in the game – forever. Like cigarettes or booze or drugs – addictions are for life.
Which may help to explain current policy? The big players are not sensible people trying to create value. They are addicted gamblers? Now, it is always catastrophic on the street when a dealer gets addicted to his own product (pun intended). Implosion vs. Total Kontrol : The dealers’s dilemma?
To put it mildly : what the US is experiencing right now is the “good dealer gone bad” problem at the national level?
Historically : when a dealer get addicted to his own product his days are numbered. There will always be a dealer out there to satisfy basic human needs. Which means : I would suspect that the US banks are about to get hit by one of the hardest, fastest and most brutal power plays in history. It’s a high-stakes game and I haven’t noticed a lot of good chatter on the street about the existing bankers (insert your favorite insulting term for them here). Nobody is happy with them now. The trust, goodwill and loyalty are gone.
It’s a violent universe. I wouldn’t be surprised if there were swaps being offered privately on the lives of key bankers. And we all know how that turns out. Talk about poetic justice…
Last but not least : according to Buddist teachings (the way that I understand them) the easy way to achieve immortality is to do things which are really stupid (which guarantees that you will get reborn). Personally, I think that this is the real “root cause” – the survival instinct of the individual ego is the basis of stupid behaviour. Unless directly threatened, the survival instinct is lazy. The easy road to immortality will do just fine.
Craving anything (good or bad) is the root of rebirth. Craving is addiction. And, as funny as it might sound : life itself is just an addiction. Life is just a bad habit of the mind. Enlightenment is achieved by breaking a very specific bad habit of the mind which causes the end of being reborn?
Addiction is the human condition. So, don’t expect too much from the banksters now. They’re definitely lost in the snow without a compass.
On the other hand, a banker reading this might “see the light”. Better late than never? I really am writing this on a pure guess that someone will read it and the rest will be good history.
If reform from within the system was impossible then we’d still be living in caves.
Thanks for your patience with some rambling and poorly expressed thoughts.
Namke von Federlein
This is a great example of financialization at work. This auction site needs to build a large audience quickly, as well as take the money and run. It will not take forever for users to figure they’re being duped.
Speculative, easy money enabled or encouraged by the Fed, is eager for such get rich quick schemes. They could care less if this is looting, and they almost never create value in the economy. And so it goes with nearly every government scheme to manage the economy.
I should try that with my students sometimes… :)
Seriously, this swoopoo soundslike a scam. From my experience, even eBay is a waste of time, with most items I ever bought there turning out to be in much worse shape than advertized, and had to be returned.
Now I use CraigsList, which is a lot friendlier, less stressful, and since sellers are local, I could go see the item before buying it. The only negative thing about CraigsList, you have to be careful about crooks from third world places like Nigeria and the UK looking for suckers to pull an identity theft on. Just don’t go applying for free credit reports or lines of credit to sites given to you by somebody you met on CraigsList.
Vinny
Here’s a great tangent to male bidding behavior, mentioned in the excellent book “The Trouble with Testosterone” by Robert Sapolsky on the Stanford faculty.
There is a cave complex in the central California Sierras that was inhabited for centuries by native Americans. The complex is deep and dark, with traces of habitation only near the entrance — except for one spot, over a mile deep, where there is a cliff hidden in pitch darkness, with a pile of skeletons at the bottom.
All the skeletons are adolescent males.
Anthropologists presume that teenage boys periodically dared each other to walk deep into the dark complex. Every so often, one Pyrrhic “winning bidder” would never come back. This, of course, would increase the social payoff for the next adolescent male brave/reckless enough to enter the tunnel of no return.
These behavioral biases are great in astronauts, explorers and test pilots; they are somewhat less great in bankers and investors.
Nostradoofus: interesting illustration (the Amazon cave dive). May I have the exact location so I can google-map it and try it myself asap? :)
Seriously, there is a psychiatric diagnosis called “pathological gambling,” which is classified as an impulse control problem (not as an addiction).
More than twice as many men are diagnosed with pathological gambling than women, and men generally start their gambling careers earlier in life.
However, the greater occurrence in men doesn’t really have much to do with testosterone. Current neuroscience seems to indicate that at its basis are the structural and functional differences between the male vs. female brains. Men in general have a diminished ability for impulse control, partly because of the wiring between the limbic system (emotions) with the motor and reward centers of the brain, and also partly due to the diminished connectedness between the two brain hemispheres (men “sport” a seriously severed Corpus Callosum, the nerves that connect the two hemispheres).
Among other things, risk-taking behavior is also associated with traits of antisocial personality disorder (psychopaths, sociopaths). A great deal of business people (i.e., banksters, AIG/GM/etc executives) fulfill many of the diagnostic criteria for antisocial personality disorder, and I would venture to say that many qualify for the diagnosis. As far as antisocial personality disorder men greatly outnumber women. For information purposes below are the diagnostic criteria for antisocial personality disorder:
A pervasive pattern of disregard for and violation of the rights of others, as indicated by three (3) or more of the following:
1. Failure to conform to social norms with regards with respect to lawful behavior
2. Deceitfulness, as indicated by repeatedly lying, or conning others for personal profit or pleasure.
3. Impulsivity or failure to plan ahead.
4. Irritability and aggressiveness.
5. Reckless disregard for the safety of self or others.
6. Consistent irresponsibility.
7. Lack of remorse, as indicated by being indifferent to or rationalizing having hurt, mistreated, or stolen form another.
Vinny here. Looking at the above 7 criteria, I would venture to say that most banksters and a great deal of “captains of American industry” easily qualify for criteria 2, 6, 7, thus can be diagnosed as antisocials. However, I suspect many also qualify for criteria 1, 3, and 5, thus more than securing the diagnosis. The last place they need to be is in charge of the country’s finances.
Vinny
Aha. The consumer is the product. Quite simple.
Yves,
Once again, I’m swimming against the common wisdom in this discussion by noting that auctions work and the swoopo model is a big step forward from ebay’s.
Ebay, in general is getting progressively more difficult for everyone to use. (buyers/sellers) But the basic principal is sound. I’ve got some stuff and it will be sold at the highest price someone is willing to pay. Price maximization in action.
The fundamental ‘problem’ with ebay is bid sniping. It’s common for prices to double in the last 10 seconds because there are multiple last-minute bids. google ‘bid sniping’ Sniping drives away a giant group of casual bidders.
Swoopo solves the sniping problem AND maximizes sale pricing to a far greater degree than ebay. If they communicate the feature right, it’s a win-win for everybody but ebay.
Ebay is okay for buying/selling old things when you can’t get it done on craigslist. Buying anything you can easily find on Amazon.com is NOT what ebay is good for.
I went to look at Swoopo after reading this, and it doesn’t seem to me as evil as many people here think it is. You buy your bids up front in packs of 40-1000, so no one can be under any illusion that bidding is free. The timer on each auction is plainly visible and you can see the time increase every time there is a bid. So if you didn’t understand that when you started, you are going to figure it out within about 10 seconds.
The main thing that seems to make it benign is that you can use the complete cost of your bidding as a credit against the item at any time. Here’s one of the examples I saw. A “Wii Fit Plus with Balance Board” is offered. When I started watching, the bidding was around $18 with maybe 10 seconds left. 20 minutes later it ended with someone getting it for $41.28. This person had placed 26 bids to win, so that cost him another $15.60. So he paid $56.88.
This same item is on sale on Amazon for $89.99, so the winner obviously got a good deal. But someone might say that the people who didn’t win got suckered. But they really didn’t get suckered too badly, assuming they actually want to buy this item. Why? Because they can still buy the item at the “Swoop it Now” price and get a discount equal to the cost of all their failed bids. In other words, if you really want the item, you can bid all you want but you won’t ever be forced to pay more than the the Swoop it Now price.
And what is the Swoop it Now price? $94.99, or $5 more than the cost at Amazon. So if you were set on buying a Wii Fit Plus, your maximum loss relative to Amazon is $5, and for that $5 risk you got a chance at winning the item for much less than you would have to pay elsewhere, and you got all the entertainment that goes along with the thrill of the hunt.
Now it is true that Swoopo might make a lot of money on this. I believe the auction increment was 6c, so getting took 688 bids that brought in revenue of $412.80 for Swoopo. If they only sell the one item, they sold a $90 item for $454.
But, if every bidder who wanted a Wii Fit Plus went ahead and bought it after the auction, then Swoopo instead would sell maybe 50 of them for $5 more than the Amazon price for each one, plus of course the $412.80 in bid revenue which adds another $8 per unit to Swoopo’s realized price.
So, only use Swoopo for stuff you are going to buy anyway, and only if you like the entertainment value of bidding, and you probably won’t feel ripped off, and you might get a good deal.
I’ve been aware of Swoopo for at least a year, and can’t help but bring up the results of this one auction of a laptop that left me in awe: http://www.swoopo.com/auction.html?aid=166988 — the winning bid was $589.50, reached via one-penny increments, so there were a total of 58,950 bids; each of these bids cost $0.75. In other words, Swoopo sold a laptop for over $44,000!
I should probably add that the ‘FreeBids’ in the above auction aren’t free: ‘FreeBids’ are auctioned in packs on Swoopo using the same pay-per-bid mechanism.
Yves,
As usual, great post. I’d like to mention Swoopo from the point of view of an eBay seller.
My part-time job while studying for my Master’s was working for a small eBay business. The fees to sell at eBay rise regularly and the rules government search and payments seem structured to favor the biggest sellers. We were constantly having to change many listings and pay money for services that were previously free. We calculated that eBay took about 10% gross from every sale we made. Throw in employees’ wages and the costs of shipping materials — you can see how this becomes a very difficult biz to run on a small scale.
From a seller’s standpoint, Swoopo looks amazing. The fee structure is passed on to the bidders and our items would stay active as long as someone is willing to throw money down. This lessens the chance of an item having to be listed multiple times — a big saver.
From the buyer’s standpoint, paying 0.60 for a chance to get a $5 video game is a smart move. You definitely have to set limits for yourself, though…