Winnit is gambling

Sorry I've been away so long. Would you believe I was busy rescuing orphans from burning buildings? What about tigers, I was rescuing orphans from tigers? Yeah, my wife didn't believe it either.

What brought me back was reading the How it works from Winnit.com:

Winnit members bid against each other by placing their guess for the lowest, unique amount on any given product, which results in a winning price that equates to a small fraction of retail cost. The goal is to be the first (and only!) member to bid a price as close to zero as possible without guessing a price that someone else has already bid.

Yeah, this is just gambling, and I'll tell you why.

Imagine that you are the last person to bid. Let's say you are bidding on the Porsche Cayman and you've decided to bid no more than $10. Assume for the sake of argument, that of the 1000 possible bids (that is, 1¢ to $10.00), 9999 are already taken. You don't know that, of course, but it would still be a good bet: $4 for a 1000-to-1 chance of winning a $50,000 car (even after the $10,000 - $20,000 you'd pay in taxes).

But which one should you pick?

Should you pick 1¢? That's cheap, which is good, but being cheap, someone already must have picked it. Should you pick $10 then? The price will have frightened off everybody else! Ooh, everybody else who doesn't realize that what you just realized, that a higher price is more likely to be unique. On the other hand...

But after a moment, this reverie is broken by the obvious: you only have to pay your bid if you win. And be serious, is there any difference paying 1¢ for a new Porsche or $10? Of course not: either way, it's effectively a free car. And if you feel this way, so does everybody else. None of the 1000 possible bids is really any different from any of the others. Picking the winning price is just a matter of luck.

And there's a name for any game where winning is just a matter of luck: gambling.

Interestingly, if the system awarded the victory highest unique bid, it would become less like gambling. While there is obviously no meaningful difference between paying 1¢ and $10 for a sports-car, there is difference between paying $10,000 and $20,000. They are both great deals, but they are still quite distinguishable. So, at least in theory, you could plumb the psychology of your opponents and make yourself more likely win by picking the price none of them would.
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On The Media: Swoopo in The New York Times Today

Flipped open my New York Times today and what did I see? Well it was an article on a topic I know and love: penny auctions. The Times offers what for the in-the-know penny auction enthusiast would be a fairly blase overview of how Swoopo works, with a few interesting facts laced in.

We learn from the Times article that Swoopo has 2.5 million users, a number that would be more significant had Bidcactus not declined to state the number of users they have in our interview last week.

We also learn that former... hedge fund quant Glen Whitney, who the Times asked to review Swoopo, believes the site is a "chump's game."

And most interestingly, we hear from a lawyer who says It Isn't Gambling, which was also the title of an earlier Penny Auction Insider post on the topic. The lawyer backs-up the claim Malvolio and I have been making from the beginning which is, in lawyer Anthony Cabot's own words, "Lotteries are games of chance, and an auction does not have what you would call any systematic chance, a random event that determines the winner." We rest our case.

On a side note: compare this Times article to the ABC 6 story on GoBid I reviewed last week and you see why the Times is "All the news that's fit to print," and ABC 6 is something less than that. Sorry ABC, but you didn't even tell your readers the name, title or significance of your only source, a guy who's opinions formed the bulk of your story.
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It isn't gambling

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.
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Some people really don't like penny-auctions

Some people really don't like penny-auctions. And I don't mean "don't like" the way some people might say, "I don't like watching hockey on TV." No, they really don't like penny-auctions.

Jeff Atwood writes:

Swoopo [a major penny-auction site] is evil beyond the likes of Saddam Hussein, The Balrog, OSB, Darth Vader, and Barbra Streisand -- combined.

Wow, that's a lot of evil. Or at least a lot of bitterness on Mr. Atwood's part. Let's take his complaints one by one.

First, he quotes another blogger as saying that bids placed in the last few seconds of the auction are ignored. I can't confirm or deny that that is true, and there is no way to know whether it's just a delay in his Internet connection or a flaw in the Swoopo site (certainly, Swoopo isn't ignoring bid attempts on purpose -- they want as many bids as possible) but it's a common problem in real-life auctions and with online auctions. It's nothing peculiar to Swoopo or penny auctions generally.

Second, he complains there is no reliable way to win. Well, duh. If there were a reliable way to win, it wouldn't be an auction, it would be a sale.

Third, and this I think goes to the heart of his objection to penny auctions, he says it's gambling.

Well, to begin with, it isn't gambling. It just isn't. My next post (wittily entitled, "It isn't gambling") will explain why, but for the moment, just accept that it isn't.

But if it were gambling, does that really make it worse the Saddam Hussein and Barbra Streisand put together? No, Atwood admits gambling would be, "OK, I guess, if it was properly regulated as gambling" (bold-face in the original), although what kind of regulation he is hoping for is left unstated.

So his real complaint seems to be that the people who run and the people who participate in penny auctions don't agree with him when he wrongly labels it gambling.

As Lisa Simpson is wont to say, Meh.
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