Dollar Auction

It was proposed by economist economist Martin
Shubik. It illustrates a paradox brought about by traditional
rational choice
theory in which players with perfect
information in the game are compelled to make an ultimately irrational
decision based completely on a sequence of rational choices made throughout the
game.
Dollar auction is an all pay
auction having two player. The auction is for a dollar bill.
The game begins with one of the players bidding 1 cent, hoping to
make a 99 cent profit. The second player will quickly bid 2cents, as a 98 cent profit is
still desirable. Again,first bidder bids 3 cents,converting his loss of 1 cent into a
gain of 97 cents. In this way, a series of bids is maintained. However, a problem
becomes visible the moment bidding reaches 99 cents. Supposing that the other player had
bid 98 cents, he now has the choice of losing the 98 cents or bidding a dollar even,
which would make his profit zero. After that, the first 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.The game actually has no equilibrium,
as two rational players in this game could theoretically lose all of their money to the
auctioneer. Both players stand to lose money, but the winning bidder loses about 99
cents less than the losing bidder.
To end the bidding war a bidder
can bid 99 cents more than the previous bid, leaving no bid that offers a potentially
higher profit (or smaller loss). (For example, Bidder 1 bids $x, Bidder 2 bids $x +
$0.99. If Bidder 1 were to bid $x + $0.99 + $0.01, he would be bidding to pay $x + $0.99
+ $0.01 for a prize of $1, or a total loss of $x-- the same as if he had not increased
his previous bid.) As a special case of this, if the first bidder immediately bids
$0.99, he will not be outbid by the other bidder, who has no potential to make a profit.
The first bidder will earn $0.01 in profit and the second bidder will pay nothing and
win nothing.

Back into business

Friends,
Throughout the March month, I have
been ill and was not able to update the posts.
Now I am back from
hospital and feeling well, I will be continuing my posts.

The problem with Logic

A Harvard scholar, Mr. Sean
Goldstein approaches a learned Rabbi telling him that he has a Doctorate in philosophy,
and would now like to learn the Talmud to round off or complete his knowledge. After
summing him up for a few minutes, the Rabbi told him " I seriously doubt that you are
ready to study Talmud. Its the deepest book of our people. If you wish however I am
willing to examine you in logic, and if you pass the test I will teach you Talmud. "The
young man agrees. Rabbi holds up two fingers " Two men come down a chimney. One comes
with a clean face and the other comes out with a dirty face. Which one washes his
face?
The young man stares at the Rabbi. " Is that a
test in Logic? The Rabbi nods.

" The one with the dirty face
washes his face" He answers wearily.
" Wrong.
The one with the clean face washes his face. Examine the simple logic. The one with the
dirty face looks at the one with theclean face and thinks his face is clean. The one
with the clean face looks at the one with the dirty face and thinks his face is dirty.
So the one with the clean face washes his face."

"Very clever" Says Goldstein. .
" Give me another test."
The Rabbi
again holds up two fingers " Two men come down a chimney. One comes out with a clean
face and the other comes out with a dirty face. which one washes his face?

" We have already established
that. The one with the clean face washes his face"

" Wrong. Each one washes his
face. Examine the simple logic. The one with the dirty face looks at the one with the
clean face and thinks his face is clean. The one with the clean face looks at the one
with the dirty face and thinks his face is dirty. So the one with the clean face washes
his face. When the one with the dirty face sees the one with the clean face washing his
face, he also washes his face. So each one washes his
face"
" I didn't think of that! "
Says Goldstein. " Its shocking to me that I could make an error in logic. Test me
again!."
The Rabbi holds up two fingers
" Two men come down a chimney. One comes out with a clean face and the other comes out
with a dirty face. Which one washes his face?

" Each one washes his
face"
" Wrong. Neither one washes his
face. Examine the simple logic. The one with the dirty face looks at the one with the
clean face andthinks his face is clean. The one with the clean face looks at the one
with the dirty face and thinks his face is dirty. But when the one with clean face sees
that the one with the dirty face doesn't wash his face, he also doesn't wash his face So
neither one washes his face"
Goldstein
is desperate. " I am qualified to study Talmud. Please give me one more
test"
He groans when the Rabbi lifts
his two fingers "Two men come down a chimney. One comes out with a clean face and the
other comes out with
a dirty face. Which one washes
his face?
" Neither one washes his
face"
" Wrong. Do you now see, Sean,
why Socrates logic is an insufficient basis for studying the Talmud? Tell me, how is it
possible for two men to come down the same chimney, and for one to come out with a clean
face and the other with a dirty face? Dont you see? The whole question is narishkeit -
foolishness - and if you spend your life trying to answers foolish questions, all your
answers will be
foolish."

Disclaimer:
I do not own this story. I don't know if some one is copyright holder for this story. If
someone has copyright for this story please contact me at limit[dot]dgp[at]gmail[dot]com
so that I could show the credit or remove the
post.

Twitter is blocked

For friends, twitter is blocked in my company so will not be
available anymore

fsck

The Winner's Curse

This phenomenon is known as Winner's Curse. Let us take an example
and then we will talk on it.

A teacher comes in a
room with coin filled in a glass jar.The teacher gives option to the
student to guess for the total amount of money, the guy guessing largest amount of money
will be getting the jar for that price. Almost more than 60% of the student will be
bidding for nearest value of the sum in jar adhering to wisdom
of crowd and some will bid for quite lesser than the actual sum and
some will go for more than the actual sum. The guy winning the bid has paid more than
the item auctioned values. The winner always gets the feeling that he
overpaid.

First of all, let's see what common
value auction means. Common value auction is the type of auction where the item has got
a fixed value for all participant for example a 8-GB USB drive. Its market value is
fixed and costs equal for all. So, when in auction most of the people will be bidding
near the market value but the guy winning the bid must be bidding higher than other
fellows i.e. higher than its market price. So, after getting the product he gets a
felling that he could have bought it in lesser price in market.So, it becomes a losing
situation.

If the auction is not common value
auction then there is different situation. Lets take example for bidding of bat-mask and
bat-belt. I am a bat man fan so I could want to buy it for $150 but for one of my friend
who doesn't like batman at all it could have a value of less than $10. So , in this
case, the winner is not necessarily loser. One of the way to avoid winner's curse is to
bid closets to market price.

Technorati Tags:
winner, loser, auction, bidding, curse, money

Related Posts:
1.lostbid