On winning auctions

Tyler Cowen asks: "If you win something at auction, even if you end up paying your full bid, you are typically quite happy, rather than just a smidgen happy. Then why didn’t you bid more in the first place? Is your mistake being too happy, or is your mistake having bid too low?"

Possible explanations:

  1. Being in a position to bid sometimes suggests that you've found some inefficiency; it shouldn't be surprising that there's edge to be had in those cases.
  2. Being in a position to bid sometimes suggests that you've made an up-front investment (cultivating a relationship, driving somewhere on a Sunday morning, babysitting an eBay listing, or whatever). Think of it as a series of non-refundable deposits followed by a final payment. It makes sense that the final payment (alone) is less than your reservation price.
  3. It's a testament to the power of even modest barriers to entry. (Think of how important it is for many creators / sellers to access truly huge, rather than merely large, markets.)
  4. Auctions are designed to make you feel good about winning. Those social mechanisms are powerful.
  5. In some cases, the way the thing transforms from (someone else's) thing you're bidding on to a thing that you've secured is either difficult or distasteful to price into your bid. (Think of extending a social invitation by inviting someone to dinner: we conceptualize the invitee's time and attention differently when we're "bidding" for it and when we've secured it. It's very natural to be happy to have such an offer accepted, even when there's a relatively liquid market for the person's company and even when our motives are more transactional.)
  6. Come on, it's just not that hard to beat the market a lot of the time.

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