Follow Up On Swoopo: Potlach

In a previous post, I referenced a particular auction on questionably-legal but unquestionably-clever auction site Swoopo.com. The particular auction was for $1,000 cash. Well, it's still running. Here's what the auction looks like now:This is absolutely astonishing to me. The bidders are now actually paying for the right to pay more money than they are going to get back if they win. At this point, if you win the auction, you will have to pay nearly $1,200 in order to get $1,000 back.

I've got to call bullshit at this point. This doesn't even make sense.

I remember that I read once in a book that an anthropologist described a Caribbean society which used tobacco leaves as money. Periodically, one or another household would throw a party and gather as many tobacco leaves as they could spare in a big pile and, at the climax of the feast, light it on fire. The ritual was called "potlach" or something like that, and the point was to show your neighbors how wealthy you were by demonstrating how much money you could destroy simply for the sake of destroying it. The character in the book wanted to demonstrate to someone else in the book that "conspicuous consumption" was not a phenomenon limited to Western European societies. But this sort of thing is the only way I can understand the behavior of people who continue to bid on this auction -- one that they cannot possibly benefit from winning and which they must pay in order to win.

Another theory would be that these people are suffering from an extreme form of the Gambler's Fallacy -- they put in bids earlier in the auction and now feel like they need to win in order to recoup some of their losses.

Still another theory, and one that I am warming to more and more as I consider this, is that the bidders do not understand what they are doing. They must think they are bidding $.75 in order to win $1,000. That's a sort-of reasonable, or at least justifiable, kind of gamble -- provided you ignore that by winning, you are promising to pay the purchase price, an exchange of seventy-five cents for a chance at a thousand dollars makes a kind of sense.

So what seems like the most probable explanation for the bidders' behavior is that they simply do not understand what they are doing. Why else would you pay money for the right to pay more money -- and nothing more?

UPDATE: The auction finally ended, at a total bid price of $1,846.05. The "winner" placed a total of 667 bids, paying $500.25 to win. Now, I think I understand what was going on and my judgment is a little less harsh -- Swoopo apparently did not charge him the $1,846.05, which is apparently what the "100% off" means. So the only thing the winner paid was $500.25 and he reaps a net profit of $499.75. In a gambler's assessment, that's a good return on investment. It also explains why people would bid to pay more than the value of the prize -- they aren't really going to pay that money; the only cost to them is the cost to bid. In terms of Swoopo's involvement, though, this was still a hugely profitable activity -- they took in a total of $9,320.25, and had to give away $1,000, producing a net profit margin of 823%.