Two Americas
A Madoff Victim's Tale

eBay and the Endowment Effect

When bidding in auctions, our rationality is aggressively attacked.  First, we must fight what monkey wrench the endowment effect throws into our own brains.  We humans tend to value things more when we believe those things to be ours.  That's my chair, and therefore I will overestimate it's fair market value.  Once we start bidding on an item, we start to view it as ours.  It's game on for irrationality.Ebays call

Second, we must fight the endowment effect that we know other bidders have.  Other bidders will view the auctioned-off items as theirs.  Their emotions will collide with your emotions.  As everyone knows, do not get in land wars in Asia, or emotion wars in auctions.

So what should we do?

Unfortunately, the endowment effect is an emotional response.  It's hard to beat.  Forcing down the endowment effect is like forcing one's self to stop being angry.  Possible?  Sure.  But very hard.

Rather than fight it, I avoid it.  Here's how:

As regular readers know, I wanted my own copy of "The Psychology of Judgment and Decision Making."  I did not want to pay $67 for it.  Happily, I found a copy on eBay.  Bidding started at $25.  There were no bids.  What should I do?

First, I assigned what was the most I wanted to pay for the post.  In my case, it was $31.49 + $4 for shipping.  Yet I did not place a bid.  Why not?

I saw that other people had viewed the auction.  What if those people viewed the book as theirs?  They'd start bidding against me aggressively.  They'd endow the book with magical properties, raising the price.  I outflanked them all, though.

There is a service called eSnipe.  ESnipe is a computer program that will log into eBay under your name, and six seconds before an auction, place a bid.  In reality, this means you have one shot, Fancy, don't let me down. 

Because you've only placed one bid, your bid does not drive up the bidding for anyone else. 

Moreover, since you set your price ceiling in advance, there's no emotional need to keep bidding in order ot "win" the auction.  You simply walk away.  Thus, a rational eBayer should do the following:

1.  Set a price ceiling while you're calm and cool.  What is the most you're willing to pay for this item? 

2.  Go to http://esnipe.com/ and follow the instructions.

3.  DO NOT look at the auction until it's over.  Looking at the auction will allow irrationality to seep in.  What if someone had bid $32 for my precious book?   What would I have done?  Avoid the temptation to be irrational.

This method is emotion proof.  I've used it to save thousands of dollars on eBay.  While other suckers drive up the prices in auctions by bidding early and often, I wait until the very end.  No one even sees me coming.  By the time my bid has been placed, there is no time to react.

Do I win every auction?  Of course not.  Sometimes people outbid me before my bid is even placed.  In that sense, though, I have won.  I won because I did not pay more for an item in an aroused state than I would have paid for it in a calm state.

Go forth and bid rationally.

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