Saturday, September 20, 2008

More on Money, Greed and Rationality: Game Theory

Try this sometime: walk into a bar. Slap a $100 bill on the table near some other patrons and says"I'm auctioning off this $100 bill. Bidding starts at a dollar. There are only two rules: there must be at least two bidders, and the next highest losing bidder has to pay me too."

Suppose two people (Bill and Ted) start bidding. Bill and Ted can't help themselves. Bill would love to have some extra money to donate to his favorite charitable cause, and Ted is planning on using the proceeds to renew his subscription to some junk magazine (say, The Weekly Standard). A hundred smackers with bidding starting at a buck? What's not to like about that?

So Bill bids a dollar. Ted tops him by bidding $2. (Heck, who wouldn't put $2 on the line for a hundred?)

When the bidding gets up to $99, something interesting happens. Bill realizes that he is out $99 if he doesn't bid $100, but if he bids $100 he can still break even.
So he bids $100. Then Ted realizes that if he bids $101, he will only be out a buck instead of $99.

And so it goes. At some point the knife fight starts

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