Sometimes winners feel like losers. In this episode we talk about auctions, including the concept of the winner's curse and Memorial Day sales.
Liz: Hey Ben, is that a new phone.
It is. My last phone, it was three years and four months old and it just bricked itself. There I was using it, and then you know, five minutes later, it's just off.
Oh, that sucks. Well, I'm glad you're able to get a new one. Did you get a good price for it?
I guess it was okay.
Well, you know, it's too bad that you didn't break it around Memorial Day or something. Because then you could get a nice sale.
If I could have waited, that would have been nice. But you know, you can only go so long in the modern day without a phone number, you know?
Well, by the end of this episode, we're going to learn why Ben's phone, even though it's really cool, and he likes it, it's actually cursed. I'm Liz Landau.
Ben: And I'm Ben Klemens.
Liz: And this is Pod, Paper, Scissors.
Ben: So Liz, to start off, I want to tell you a sad story about oil conglomerates.
Liz: I didn't think oil conglomerates had feelings.
Ben: You're going to weep—weep, Liz—for the cursed cursed oil companies. So in this in this episode, I'm going to tell you about the Winner's Curse, which comes from oilfield auctions.
Liz: But I thought it was always good to be a winner.
Ben: Yeah. And that's what the curse is about. It's about how if you if you win an auction, you're very likely to regret winning the auction.
Liz: Why is that bad?
Ben: Here's the story. [story segue music] You're an oil conglomerate.
Liz: (Cutesy voice) That's me, an oil conglomerate.
Ben: That's way to cute. Can you give me like—what does an oil conglomerate sound like on on radio?
Liz: (In a lower register) I'm an oil conglomerate.
Ben: Okay, well, we'll have to go with that. Okay, so a new oil field has opened up, and you want to bid on the rights to drill, baby, drill. They call the auction, everyone gets together, and not only do you not want to talk to your competitors, it's actually illegal, right? It would be collusion. So you're on your own, Liz.
Liz: Well, well, I can't share information. But I'll do my own research and do some test drilling.
Ben: Okay, so let's say you find something good in the test drill. Oil fields, they have kind of like a
bell curve distribution, like if you if you get a test drill with like—I don't know these things,
you're the oil conglomerate—but like, this field is going to bear like, a million barrels. It's going to be a million barrels plus or minus something, right? Okay, so you did your test drilling. Give me a number. How many barrels of oil did you find?
Liz: I found...20 barrels of oil.
Ben: Okay, so this this field is going to bear 20 barrels of oil?
Ben: Cool. Okay, so I did some drilling. My drill was not as optimistic, and I found that the field was going to bear eight barrels. And then we have another competitor, let's call them Maurice [musical sting], and Maurice did some drilling and found like 10 barrels. Okay, so we're all going to bid. I don't know what a barrel of oil costs these days. I—
Liz: Let's just call it $1.
Ben: Okay, that's as plausible to me as any other number. Maurice is going to bid $10, and I'm going to bid $8, and you're going to bid 20. Maybe you'll lowball and bid 19. So you're gonna win the auction, and you're gonna lose, right? So you just paid $19 because you were the high bidder, because you had the highest random draw out of this field. Then you go out, you keep drilling and you find out, well, actually, you've only got like 10 barrels of oil. That means you paid too much.
Liz: Well, that's not fair. If I had known what other people found, then I probably would have been something in the middle.
Ben: You're cursed. And now this is where we feel bad for Liz, the oil conglomerate. There's nothing she can do.
Liz: Oh, I get it. The solution is to have as much money as possible. So you don't feel bad for overpaying.
Ben: I guess that's what the oil conglomerates actually do. I was gonna go with _Wargames,_ you know, "the only way to win is to not play". But yeah, you're oil conglomerates aren't going to do that. So that's that's the Winner's Curse. If you're in an auction type situation, there's there's always a risk for this.
Liz: You know that story about the oil company and overpaying for oil, it kind of reminds me of when I bought a pair of pants.
Ben: Tell me about the pants.
Liz: In the before times when coworkers actually saw the bottom half of your body, I liked buying
nice pants. And when I was with my friend at Anthropologie I saw this pair of pants. It's kind of
Capri style with brown flowers. I felt like it would be perfect for autumn, even though it was
August. I bought them even though they were $128. I was like, well—
Ben: That's $64 per pant.
Liz: That is $64 per leg, that is true.
Ben: Or maybe it would have been 70, but you got a volume discount.
Liz: I guess so. Did you know that topologically speaking, pants have two holes?
Ben: Uh, wait so we're off topic, though _my mind is blown_. Okay, so you bought a two-holed a piece of apparel.
Liz: And I was very satisfied with my purchase. They looked great on me, the waist fit perfectly. It was showing off my ankles, which I was proud of at that time, but guess what!
Ben: Then what happened?
Liz: A couple months later, I was in a different Anthropologie store back in Pasadena, and my pants that I already owned, were on sale at half price.
Ben: Wow. So two pants for the price of one.
Liz: Yeah. And not only that, after Black Friday, the same pair of pants was basically discounted 80% off the price that I originally paid.
Ben: That's pretty deep.
Liz: This whole situation got me thinking about how, especially with a clothing store that has the cycles of discounts according to federal holidays, like Labor Day, Thanksgiving, Christmas, as a consumer, it's almost like you are participating in an auction. Like if you 100% want that pair of pants, that dress, that shirt, and you are not willing to take the risk that it will sell out in your size, then you'll pay full price. But if you're willing to wait until the next sale, then you'll get at least a 20 or 30% discount. And if you're really willing to wager that the item that you want is still available, maybe even three or four months later, you might actually get more than half discount.
Ben: So you can picture an auctioneer standing there saying, "I've got this pile of pants. Who will pay 129? 129! Do I hear 129?"
Liz: It was as though I said "I shall!" I shall pay 128 plus tax.
Ben: And then a week later, the auctioneer is like "100! I've got some pants left who wants to pay 100." And then a month later, the auctioneer is down to "alright 30 bucks, who pay 30 bucks for these?" Yeah, I hadn't thought about it this auction like but I guess that's the kind of thing they're doing. The term for this, by the way is "Dutch auction", this sort of thing where you start at the highest price. And you just sort of wait to see if anyone will buy at a certain price. It comes from how they sold tulips. That's why it's Dutch. So they they have this giant clock. So they put out a lot of tulips, and the clock starts at I don't know, like $100 or something. And it slowly ticks down 99, 98, 97. And at some point somebody says "stop the clock I'll buy" and they stopped the clock and that person walks away.
So wait, so getting back to the Winner's Curse. Did you regret buying the pants? Were they not worth $129? Once you took them home and put them on?
Liz: I have to say, I really love them. I still do. But it could be a post-purchase rationalization.
Ben: How are you rationalizing?
Liz: Yeah, when you pay too much for something, you can still make yourself feel better by saying it was worth it.
Ben: Okay, I've probably done this many times.
Liz: Oh, is that how you feel about your house, Ben?
Ben: Yeah. Though I think I think I'm forthright about my regrets on that. So yeah, house bidding winners curses are easy to have, right? They're exactly what we've been talking about. You have a bunch of people and they all show up, and they inspect the thing, and they're like, Well, here's how I think it's going to go up in the next couple years, etc, etc. And then the highest bidder wins.
To tell you about me, I bought a house in catastrophic condition.
Ben: Yeah, we named it The Partisan, because it leans. It had some foundation damage, and throughout the house, it was in very bad condition. The prior owner was in bad health and he was basically physically incapable of maintaining the house. That's kind of sad, but the Winner's Curse comes in here because I came in and looked at the damage and I was like, "well, I don't know what it's gonna cost. I'm a total amateur. It'll cost $50. I don't know, duct tape the the house to the house next door or something." And other people came in, and they were like, "no, this is catastrophic, and it's gonna cost us $300,000 to fix" or something. So I was the dumb one. I was the one who was too optimistic. And so I won the bid. And in winning the bid that indicated that I was too optimistic about how much it would cost to fix the house.
Liz: And to think, Ben, you put all that money and effort into it, and now you have a podcasting studio.
Ben: Indeed. [embarrassed laughter] But yeah, it was a it was all worth it, I will ex post rationalize.
But yeah, the house buying, it's exactly an example of this kind of thing, where everyone has their own independent evaluation, and they all come in and look, and you know, the the final outcome is that the person who was more optimistic than everyone else—and yeah, you know, like, if they all got together and voted, they would come to a consensus that cost if the fixes, or the value of the house is closer to the middle, and not up where the high bidder is bidding.
Liz: All right, well, it's not like we should tell people to stop buying houses. So I mean, what would be a better way to do things?
Ben: Well, there are a couple of ways to do it. And you know, for a lot of other auctions like that the Dutch auction, by the way, look how much information gets hidden. Right? You can't see what other people want to bid for the item. And so you just have to guess, but if you and if you win, the only thing you know is that other people's values were lower, but you don't know like, were they all thinking it's worth $1? Or did they think it was worth $99 and you bid 100. Part of the point of a Dutch auction is that it sort of hides a lot of other people's thinking. So the more information you can share, the better off you are. That's one thing.
Liz: Wait, what? Okay, how does that relate to shopping and anthropology? Okay, because we're not buying tulips with a clock.
Ben: We're buying pants
Liz: We're buying pants at a posh bougie store for women who want to dress nicely.
Ben: Yeah, so Anthropologie wants to hide the information too. Imagine if they came out and told you, you know, here's our schedule, it's gonna be 129, and then six months from now, it's gonna be $30. You said 128, and I keep saying 129?
Liz: Doesn't matter.
Ben: Okay, if you had that information, then you wouldn't play the game, right?
Liz: No, but but here's the thing, Ben, is that there's only so many pairs of pants, and there's only so many in each size. So even if you had perfect information that six months from now, if there are still pants available, they will be $100 less, you don't know how many will actually be available in six months.
Ben: Huh, interesting.
Liz: That's why when I go in these days, and I see something I really love, sometimes I will still
pay full price, if I don't want to take the risk that the particular size of the particular dress or pants or shirt won't be there when it does become cheaper.
Ben: So you're minimizing regret?
Liz: You know what Ben, I've actually been on a eBay and consignment shop kick in recent years, because I'd like to think that I'm not contributing to clothing waste. It's very sustainable and often cheaper. And in fact, I can recognize things that I've seen it Anthropologie and similar stores years ago, on eBay.
Ben: Yeah. And they're an auction site. Right.
Liz: That's an actual auction.
Ben: Yeah. And they have this problem that if the winners curse hits every every bidder every winner, like you're not going to come back. So so they can't treat the customers like oil conglomerates.
Liz: Maybe we should talk about that more on next episode.
Ben: I think we should I think, how eBay does its auctions is it's a generalizes to a lot of things,
including back to house buying. And there's a lot of interesting game theory to it. So yeah, let's tune in next time. And we'll cover cover second price auctions
Both: on pod paper scissors.
What is Pod Paper Scissors?
Pod Paper Scissors considers the glitches in our society due to the hidden games in everyday human interactions. Each week, hosts Ben Klemens and Liz Landau discuss a different topic relating to social interaction including markets, politics, trends, and other core facets of our society, in a causal conversation format with original songs and interviews with knowledgeable guests.