Ariely Misses an Obvious Economic Explanation
Psychologist Dan Ariely, who writes an “Ask Ariely” column in the weekend Wall Street Journal, leads in last weekend’s column with a psychological explanation of a phenomenon that often arises in auctions. In doing so, he fails to consider an obvious economic explanation.
Questioner Liron writes:
Recently I was at an auction of antiques that included some pretty unappealing items. For one item in particular, the auctioneer started the bidding at $20, but no one was willing to go that high. The auctioneer then reduced the price to $10, and at that price, many people began to bid. In fact, the bids quickly went above $20. How can it be that an item no one wanted to pay $20 for ended up selling for much more?
Your story is a good illustration of the idea of “auction fever.” In auctions, people have to make an initial decision whether or not to participate in the bidding, and the starting price plays an important role. In this case, $20 seemed like too much to pay to get into the auction.
But once we enter an auction and start bidding on an item, we begin to think of it as ours, which makes us like it more. Instead of asking ourselves “Do I want to pay this price for this item?” we start thinking, “I am not going to let someone take this item away from me.” The result is that we end up paying a higher price because of our feelings of attachment.
Do you see the obvious explanation Ariely omits? Let’s say a number of bidders know that they value the item at $20 or more. What they don’t know is that there are others in the room who also do. So when the auctioneer opens with $20, various people willing to pay more might think that, correctly, it turns out, if they don’t bid, the auctioneer will lower the opening ask. So the auctioneer cuts it to $10. Then someone who values it at more than $10 bids $10. And with that, the bids rise. As they progress, various bidders find out more about what other bidders’ minimum value is. So it’s easy to understand how multiple bidders go above $20.
Is Ariely’s explanation plausible? I guess. But what’s shocking is that Ariely doesn’t even consider a straightforward economic explanation.
In that same column, in response to the final questioner’s query, Ariely writes:
One key to understanding how politics works is the concept of “motivated reasoning”—our tendency to interpret data in a way that is consistent with our worldview, to see only what we want to see.
Do you see the irony?
P.S. For more on auctions, see Leslie R. Fine, “Auctions,” in The Concise Encyclopedia of Economics.