When It's Time to Dump a Bad Undertaking

One more variation of the game theory is the Dollar Auction. Wikipedia has a very good description of the game:

“The setup involves an auctioneer who volunteers to auction off a dollar bill with the following rule: the dollar goes to the highest bidder, who pays the amount he bids. The second-highest bidder also must pay the highest amount that he bid, but gets nothing in return.

“Suppose that the game begins with one of the players bidding 1 cent, hoping to make a 99 cent profit. He will quickly be outbid by another player bidding 2 cents, as a 98 cent profit is still desirable. However, a problem becomes evident as soon as the bidding reaches 99 cents.

“Supposing that the other player had bid 98 cents, they now have the choice of losing the 98 cents or bidding a dollar even, which would make their profit zero. After that, the original player has a choice of either losing 99 cents or bidding $1.01, and only losing one cent. After this point the two players continue to bid the value up well beyond the dollar, and neither stands to profit.”

Sounds like a ridiculous game whose intent is to exploit the greedy side of the bidders. Neither one wants to end up a bitter looser. In reality, neither bidder wins because they often bid way above $1. It’s ironic, though, that we see this game around us every single day.

“One way to recognize a dollar auction in real life is that it inspires certain figures of speech: “throwing good money after bad”; persevering “so that it all won’t have been in vain” or because there is no way to quit and “save face”; having “too much invested to quit.” (Prisoner’s Dilemma)

Some other examples William Poundstone cites in his book are:

• waiting in a long line at an amusement park just because you’ve already waited forever;
• repairing an old car prime for salvage;
• staying in a bad job or bad marriage;
• sitting through a dumb movie just because you’ve paid for it;
• unions going on strikes;
• staying on hold too long thinking you’re wasted a lot of time so waiting even longer won’t hurt, etc

Unless you’ve lived under a rock for the past couple of years, the Dollar Auction concept should sound painfully familiar.

I didn't know there was a name for that. I see it every fricken day. Awesome.

Well you forgot one important component. Sometimes you need to stick through the bad for the future, or due to some commitment.

You have a contract that is not going well, but you finish it out because of the contract that will follow it with a HUGE upside.

You gave your word to finish something, so you do. Otherwise what money you lose here will only be compounded by the money you lose later by damaging your reputation.

Marriage is generally based on religious things, and a persons religious background will play into sticking it out through things like 'bad marriages.'

I agree! The balance between "we need to wait it out" and "enough is enough" is impossible to model with a mathematical formula, which is what much of the game theory is.

I love this post and enjoy even more seeing people respond who "get it". Another name for this situation is "Sunk Cost": http://www.google.com/search?q=%22sunk+cost%22&hl=en

So many managers in business don't get this concept, it's amazing... I guess some of them get it, but plow ahead anyhow to cover their can for spending the money in the first place. (Even if the initial decision was a good one at the time - they are worried because they know that their superiors don't get it...)

I think about this when I play or watch poker - you have to remember that your decision is based on what's in front of you, not what has already happened. So you have $3,000 in the pot but you're now convinced you don't have the best hand; if you think about what you've already spent, and the payoff if you win, you'll call your opponent's re-raise, and lose. If you fold instead, you lose what's in the pot, but that money was gone already - you saved yourself future loss.

The example of waiting in a long line for a ride is a good one - it's not a question of whether it's worth it to stay for the last quarter of a 60 minute wait; it's a question of whether it's worth spending the next 15 minutes it will take to get on the ride. However you decide, you're not getting the last 45 minutes back.