Many new penny auction bidders often ask us why there are some bidders who bid like crazy. Some have even insisted that the real bidder who spends $300 in bids for a $50 gift card has to be a shill (employee/bot) bidding. Though [unfortunately] this is sometimes the case, often real bidders exceed the value of an item for a few different reasons:
1. To Win
Some penny auction bidders need to win at all costs. Yes, even if they already have a pile of new iPads in boxes strewn about their living room floor, and this was yesterday’s mail:
2. To Lose Less?
They would rather spend more bids (lose more money) and walk away with the item, than lose the bids they’ve spent and walk away empty handed. Their costs are sunk.
“Sunk costs are unrecoverable past expenditures. These should not normally be taken into account when determining whether to continue a project or abandon it, because they cannot be recovered either way. It is a common instinct to count them, however.”-About.com
“Sunk costs greatly affect actors’ decisions, because humans are inherently loss-averse and thus normally act irrationally when making economic decisions.”-Wikipedia
Sunk Cost Fallacy: We’re more likely to continue investing in something even after the decision turns out to have been a bad one. In penny auction bidding we continue to bid hoping we win sooner because we have already spent the money and haven’t won yet.
It is the sunk nature of penny auction bidding that leads bidder to continue to bid.
“Once you’ve irrevocably paid for something you should take that into account when considering what to do next… The only time you should take into account sunk costs, is when you’re learning from previous mistakes.”-Plonkee
Toomas Hinnosaar in his equilibrium analysis of penny auctions, shows that the huge change in prices in penny auctions is in fact implied by fully rational bidders who are not prone to any sunk-cost fallacy.
3. Revenge Bidding
As much as we don’t like the term “jumper,” some bidders definitely see jumping in on a penny auction item after it’s been going for awhile to be quite the penny auction faux pas. As a result, some bidders undertake in “revenge bidding.” Yep, they’ll bid against you to the tune of hundreds of bids even if they don’t want that cheap item! No, they don’t turn green like the Hulk, but they’re livid and they show it in bids.
4. To Win Again Cheaper
Yep, some bidders will spend an exorbitant amount of bids on 1 item to get subsequent items cheaper. It works, sometimes.
So there you have it, some bidders bid to win no matter the cost. They bid just so they walk away with some thing even if it means spending more. They bid because they’re just downright vengeful, and they bid just so that they might win again, cheaper.
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