You remember Kindergarten Cop, the scene where Arnold Schwarzenegger is arguing with a bunch of school-children about why he has a headache? "Maybe it's a tumor," one kid helpfully suggests. "It's not a tumor!" Schwarzenegger bellows.
I sometimes feel like that when talking about penny auctions with people who don't play them. I want to yell, "It's not gambling!"
And it isn't gambling.
Gambling means playing games of chance for money -- and in penny auctions, there's no element of chance. None. The outcome of the auction is strictly dictated by the actions of the players, the same as regular auctions, the same, for that matter, as chess.
Why do people sometimes complain that it feels like gambling? That it feels like there is a huge element of chance?
Two reasons. The first is, it depends a lot of factors that aren't random but that the bidders don't know: the number of other bidders, their state of mind, the actual value of the merchandise, and so on.
That factor isn't unusual. When you buy or sell a house (something I just did), there is a very similar set of question. What is the house really worth? How many potential buyers are out there? How much can they spend?
The other factor is game theory. Let me explain.
Say, you are in an ordinary auction. A laptop is on the block, the current bid is $400, you have to decide whether to bid or not. The question is pretty simple: is the laptop worth $401 to you? If it isn't, don't bid. If it is, bid -- you'll either win and get it, or someone will overbid and you have lost nothing.
But now imagine you are in a penny auction. There's a laptop selling for $40. Of course, a laptop is worth $40; even if you don't want a laptop, you could put it on Craig's List and make a bundle. Given that, you should definitely bid, shouldn't you?
Well, no, you might be overbid and then you're out a dollar -- indeed, you almost certainly will be overbid, because a laptop that is a good buy at $40 is probably still a good buy at $40.01. So you shouldn't bid.
But wait, the person who is waiting to outbid you is asking himself the same question -- and if he has the same question, he should get the same answer, and not bid. But if he isn't going to bid, then you should!
To make it worse, the value of winning decreases as the auction goes on. If you get a $400 laptop for $40, you've won the equivalent of $360; if the laptop goes for $40.01, you've only won $359.99, not quite as good a deal.
On the other hand, as the value of winning decreases, the chance of winning increases, because fewer and fewer people are willing to pay a dollar for a chance at the smaller amount.
On the other-other hand, if fewer people are willing to play, more people are willing to play, because they can reason that other players have been chased away. (Remember Yogi Berra saying about a local restaurant, ""Nobody goes there no more; it's too crowded!" Remember my saying, "Penny auctions are popular because they're unpopular.")
All these weird, contradictory influences make a penny auction, although exhilarating, very difficult to comprehend and almost impossible to win reliably.
But it isn't gambling.