Why we pay extra money at auctions

The psychology behind bidding

🏷️ Categories: Behavior, Decision making and biases.

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Gambling and auctions are nothing new.

From ancient Roman marketplaces to modern digital platforms like eBay, they have always been with us. While the desire to find a bargain is universal, the reality is that many end up paying more than they should. This irrational behaviour is not accidental, it has a lot to do with the way we relate to each other and how humans make decisions.

Let's look at the psychological techniques that auctions exploit to make us pay more.

1. Aversion to loss

The fear of losing is much more powerful than the joy of winning.

We would rather avoid losses than achieve equivalent gains (Kahneman & Tversky, 1984). Furthermore, it is known that a brain region called the striatum decreases its activity when we lose in competitive environments such as auctions, but this does not happen in non-competitive situations such as lotteries (Tom et al., 2007).

Striatum response in auction and lottery situation (Delgado et al., 2008)

Striatum response in auction and lottery situations (Delgado et al., 2008).

What does this mean?

It means that the fear of losing pushes us to bid more and more. There is another key factor in auctions, if they are done in the presence of other competitors, they are played more impulsively just because it is a social environment (Rockloff & Dyer, 2007).

No one wants to lose the bidding, let alone in front of everyone.

That is why people pay more for products that are not really worth that much and everyone knows it.

2. Principle of Scarcity

Auctions use this law of persuasion in a masterful way.

This principle explains that we overvalue things that we believe could be sold out. Auctioned objects are scarce by definition. They are unique (only one person can have the auctioned item) and scarce in time (once the bidding is over, you have lost your chance). Think about how many times people have tried to sell you something by saying: ‘Last day of sales’, or ‘Last items in stock!

This is one of the most powerful ways to manipulate people's decisions.

This leads many people to raise their bids irrationally, but there's more...

3. Principle of social proof

We all tend to imitate other people, sometimes without even realising it.

If everyone else does or says something, most of us join in that behaviour before we think about what we should actually do (Cialdini, 2009). It is innate. Auctions take advantage of this human behaviour because they gather many people around an object. This makes us perceive it as more valuable.

If everyone bids on something, it must be worth getting.

This is how bids go through the roof in an absurd way.

Image by Jp Valery on Unsplash

Winning feels good.

Winning publicly feels a hundred times better.

That's how human beings are.

✍️ Your turn: Have you ever stopped to think about how easily influenced human beings are? It's amazing when you stop to observe.

💭 Quote of the day: «No one has ever made a decision by a number. They need to tell themselves a story.» Daniel Kahneman in The Undoing Project, by Michael Lewis.

See you next time! 👋

References 📚

1. Cialdini, R. B., PhD. (2009). Influence: The Psychology of Persuasion.

2. Delgado, M. R., Schotter, A., Ozbay, E. Y., & Phelps, E. A. (2008). Understanding Overbidding: Using the Neural Circuitry of Reward to Design Economic Auctions. Science, 321(5897), 1849-1852. URL

3. Kahneman, D., & Tversky, A. (1984). Choices, values, and frames. American Psychologist, 39(4), 341-350. URL

4. Rockloff, M. J., & Dyer, V. (2006). An Experiment on the Social Facilitation of Gambling Behavior. Journal Of Gambling Studies, 23(1), 1-12. URL

5. Tom, S. M., Fox, C. R., Trepel, C., & Poldrack, R. A. (2007). The Neural Basis of Loss Aversion in Decision-Making Under Risk. Science, 315(5811), 515-518. URL