We’re excited to introduce the first Penny Auction Watch guest blog!
Hi, I’m Malvolio, and I write my own penny-auction blog, Penny Auction Insider, focusing on the game, on how (and whether) to play, strategy, and so forth. My co-blogger on the site writes about business aspects: profitability of the different sites, public awareness, advertising, that kind of thing. The kind people at Penny Auction Watch offered to let me guest-blog, so I’m using the opportunity to defend my second-favorite leisure-time activity, penny auctions, against a scurrilous attack.
We all say dumb things now and again, but if we’re lucky, we don’t say them in the New York Times:
In aggregate, consumers trying to obtain these products are overpaying, said Glen Whitney, a mathematician and a former quantitative analyst at the hedge fund Renaissance Technologies, who was asked to evaluate Swoopo. â€œUnless you have an edge over other people who are bidding, and you can get them to subsidize your purchase, you shouldn’t do it, it’s a chump’s game.
When you say something as definitively as that, it would help if you’re right. Whitney’s point is that bid-fee auctions are a negative-sum game, because the auctioneer is extracting value that would otherwise be shared by the players.
Whitney is just not wrong, he’s wrong twice. Let me explain.
First, is the game truly negative-sum? Consider going to the movies. You spend $10 and two hours watching Harry Potter and the Endless Parade of Sequels and what do you get in return? Well, nothing. You walk out with nothing but the fast-fading memory. Same with concerts, plays, books.
Second, is “summing”, addition, the best way to consider value? Consider: which would you rather have, $500,000 or a 50/50 chance of winning $1 million? Most people would much, much rather have the former, although to a mathematician like Whitney, the two alternatives are equivalent. Conversely, which would you rather have, one dollar or a 1-in-a-million chance of winning $1 million? Again, two “mathematically equivalent” choices, but this time, most people would pick the second.
It’s called “the non-linearity of money”. A person might consider $1 and $2 both to be about the same — almost nothing — and consider $1 billion and $2 billion about the same — almost all the money in the world — but be very sensitive to the difference between $100 and $200.
Many people, perhaps most people, would prefer buying a slim chance of winning a nearly-free TV to simply paying full-price for the same TV. They can lose $2 or $10 and not feel it, but having to pay $2,000 for a new flatscreen means not buying anything at all.
If Whitney really denies this phenomenon exists, he should ask himself, would he play double-or-nothing on the flip of a fair coin, with his entire life’s savings? I certainly wouldn’t — losing my whole life’s saving would be much more bad than doubling it would be good — but if he apparently would. After all, it would be a zero-sum game.
-Penny Auction Insider
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