Tuesday, July 21, 2009

Sunk cost

Remember The Sting? There's a scene where Robert Redford eyes his nemesis, Robert Shaw, from a distance. "He's not as smart as he thinks he is," Redford says to buddy Paul Newman. Newman retorts, "Neither are we."

Washington Post columnist Mark Gimein isn't as smart as he thinks he is. Here's what he says about us poor fools who bid on penny auctions:
What makes [penny auctions] so fiendishly compelling is the tendency of people to think of the bids that they have already put in as a "sunk cost" -- money that they have already put toward buying the item. This is an illusion. The fact that you have already bid 200 times does not mean that your chance of winning on the 201st bid is any higher than it was at the very beginning.
That's a good story, but it isn't true. The money a bidder has already put into an auction is submerged, but not sunk. It served two purposes: first, it drove up the price of the auction, making it less attractive to other bidders. Second, and arguably more important, it demonstrated the bidder's seriousness. "Sure," you are telling the world, "you could jump in and overbid me, but you're just wasting your money. I'm here to win."

I'd like to play poker against Mr. Gimein. He isn't as smart as he thinks he is.

Of course, neither am I.

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