Penny Auctions: A Chump’s Game?

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. “Unless 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.

So, is the entire entertainment industry a scam? Of course not: entertainment itself has value.  People play bid-fee auctions because they enjoy bid-fee auctions, because they are entertained by bid-fee auctions, even if they don’t always win. (In an upcoming post, I’ll discuss why people find these auctions entertaining.)

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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19 comments… add one
  • Weronika August 20, 2009, 11:07 am

    Excellent article!

    Very true that many people enjoy penny auctions.

    On the other hand, I feel that some people bidding on auction get upset because they didn’t understand the concept in the first place.

    Reply
  • Pursuing Swoopo to d September 26, 2009, 3:10 pm

    Look, I have bid on e-Bay strategically before, for the purpose of reselling items for a profit. I saw this penny auction thing and it seemed similar. I gave it a try but see that it (at least as tried on Swoopo) is flawed so much that CHANCE plays an inextricably enormous role, as well as suspect bidding patterns. I cannot PAY my bills–I RENT an apartment, instead of BUY a home b/c I cannot afford the difference between rent and mortgage payments–and I've been at this threshold for years. I'm 32 years old, a divorced father of 2 boys, a 4-year college grad, and I CANNOT PAY MY BILLS. What attracted me to Swoopo? Not the chance to win a video game system for a small fraction of retail price so I can spend endless hours in mindless play.

    To Weronika, people understand what they are honestly told and what is emphasized. What is emphasized and told us by auctions like Swoopo is "you can win retail items at a fraction of the cost if you come here," NOT "Come here for bidding fun, but mind you, unless you want to spend far more than you go home with, you are NOT going to go home with more than you came. In fact, our intention is to keep the money you bring, minus a small fraction that will go back to a fraction of you. Just like any good casino, we have forcefully stacked the odds against your coming out ahead. This AUCTION does NOT have as its primary purpose the open transfer of goods from us to you, but the transfer of your money to us for the 'service' of 'entertainment shopping.'" But when all the advertisements FOCUS on WINNING auctions, which is rare and predominantly by CHANCE ( = is gambling), don't tell me people are not rightful to be upset.

    Reply
  • Stop being Stupid January 30, 2010, 10:10 am

    They lay out the rules of gameplay clearly. You made the decision to play. Stop being a sucker, and even more importantly stop being a sucker and then crying about it. If you don't have money… stop putting yourself in positions where you can lose what little you have. It takes money to make money, and apparently it takes more than you have. The only people making clean profit from these sites are the people who built them. Why don't you spend your time learning a new skill, like building a website of this type, rather than losing your money playing on one…. The world is filled with suckers… and suckers invented blogging. Get a life.

    Reply
    • Precious January 27, 2011, 10:57 am

      I know MyCashAuction is honest and bid there daily. Am thrilled with it

      Reply
  • Anon March 4, 2010, 3:51 pm

    This website presently has illegal clauses in its warranty conditions for UK use.

    The bidder has to pay for the "privilege" of bidding and be the winning bidder.

    The bidder then has to purchase the item at the price they have won.

    So let us say I won a DSLR at bid £2:40.

    The value of the DSLR is obfuscated in the way the tokens have amounted.

    If there is a problem with the goods… it cannot really be covered under the terms of the sales of goods act because it was "WON" even though it was "SOLD".

    I also tend to wonder if this is not a tax dodge as well.

    Selling a £500 DSLR for £550 returns a profit of £50.

    Selling the same DSLR at £4:50 creates a company loss of £545:50

    [viz £550 – £4:50 ]

    Other gains / loses are exempt because they are on a gaming clause.

    Reply
  • noshi July 31, 2010, 8:23 pm

    "Stop being Stupid"

    Unfortunately the ones that tend to flock to these "one-armed bandits" of a site are the compulsive gambler types. Anyone with enough common sense will know that penny auction sites are a ripoff to the average user.

    Also I would never bother with the 1:1,000,000 chance. Just take the guaranteed $1 and get a can of soda. -_-

    Wikipedia has a good page that explains the flaws of these sites.
    http://en.wikipedia.org/wiki/Dollar_auction

    Reply
  • Bids4LessStore September 13, 2010, 12:45 pm

    We are a brand new penny auction website that just opened up. We sell brand new, brand name products , at a fraction of the price. Come check out our website and our facebook and twitter for your 4 FREE bids. Bids4LessStire.com! Good Luck Bidders

    Reply
  • jason September 15, 2010, 3:44 pm

    I must say there is a new penny auction in town. It is http://www.freebidder.com and if you like penny auctions buy havnt found a good on this is it. I’d say it will be the #1 penny auction site soon. They have the best support and even have live support. Not to mention they don’t get you on shipping because the shipping free. So if you like penny auctions i recommend this site. Plus you can use this code and get 100 free bids 11203thk23 Good Luck and see you at Freebidder

    Reply
  • Bid Penny September 22, 2010, 7:05 pm

    I love penny auction sites. I think they are a great way to save money in this tough economy. If you want more information about penny auction sites, visit my blog:

    http://bidpenny.blogspot.com/

    Updated daily!

    Reply
  • Victoria October 5, 2010, 3:27 pm

    I recently came across a penny auction site, http://www.freebidder.com/ It's easy to use and auctions off very popular items. They offer free shipping on every auction that you win. Great help from their FAQ section and Live Support. I recommend everyone try it out!

    Reply
  • Sinister October 15, 2010, 12:20 pm

    Not all penny auctions are a scam or a bad thing. The way to tell the fakes from the legit ones is to monitor the live auctions. If you go on there and see that someone is actually winning a bid ever few seconds. I actually found a penny auction site that is legit plus up to 3 people win, no bots biding, and where you can make money by inviting your buddies .http://www.bidswow.com/signup.php?referral=Deez2Nutts

    Oh and if you bid often you even get free bids.

    Reply
  • Nuttsin Yamouth October 15, 2010, 5:14 pm

    Why would you speak of penny auctions in a negative way but still have ads for various penny auctions plastered all over your page?

    Reply
  • Patty Patenteaud January 27, 2011, 10:56 am

    I am thrilled with this new penny auction site. MyCashAuction.com. Great prizes and an honest site. Tks Patty

    Reply
  • Penny Auction Sites March 2, 2011, 3:23 pm

    I have one so much on penny auctions. Love them.. You just have to know what you are doing!

    Reply
  • online bidding sites July 20, 2011, 1:49 am

    I’m quite lucky, I’ve won 2 really cheap things from BidCactus, they are really good!

    Reply
  • BidHive January 18, 2012, 5:28 am

    If you’re smart, and run a good system, on a not too crowded penny auctions site you can turn a profit, this is probably only 1% of people, but people are creating excel charts and indepth analysis of their competitors, optimal bid times, and many many other forms of data to gain the upper hand, and I’ve seen it work for people.

    Like the guy who plays blackjack in a casino and gets kicked out because he’s counting cards and gaming the system, where there’s a will there’s a way, and people have found a way.

    Reply

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