Auctions are particularly interesting from both an economic standpoint and a psychological one.
Case in point: on a recent episode of BBC's Homes Under the Hammer, two guys — Steven and Simon — bought a property at auction. The property was in relatively good condition but needed some work done.
The catalogue guide price for the property was £285k. Steven and Simon (S&S) had done their research, viewed the property and read the legal pack.
At the auction, the auctioneer opened the bidding at £280k — no hands. He tried £270k, still no interest. At £260k, Steven put his hand up. The auctioneer asked for £265k and someone else bid. Steven bid again at £270k. The other bidder shook his head. The auctioneer gave fair warning and dropped the hammer. Steven and Simon had their property for £270k.
When the show went to interview S&S, it became apparent that their underlying feelings were not that they had bagged a bargain, but that they had missed something that everyone else had seen.
I wasn't privy to, and have no knowledge of, what actually went on with Steven and Simon prior to the auction, but I imagine the conversation went something along these lines. They knew from the catalogue that the guide price was £285k (the anchor). They would have known that this was only an estimate. They had done some research on prices in the area and had a feel for what they could sell the finished property for. They estimated building costs to get the property to a fit state to sell. They probably had a chat and decided that their max spend, given all of the above, was around the £300k mark, and planned their bidding strategy accordingly.
At the auction, the hammer dropped at £270k — based on my guess of their max, a full 10% lower than they were willing to pay. An absolute bargain. One would expect them to be ecstatic. But they weren't — classic winner's curse. Their psychological response was totally the opposite of ecstasy: it was regret, remorse and fear that they had missed something. Why was no one else bidding? Why did only one other potential buyer value the property above £265k?
It is these reactions and responses that I find fascinating — the 'predictably irrational' thoughts. This is precisely what draws me to the field of decision sciences.
For those that are interested, S&S spent a further £40k renovating the property and the show ended with two estate agents valuing the property between £375k and £400k — a profit of £65k to £90k. The interesting thing was that when Steven and Simon heard the valuations, they both expressed the same feeling: relief.
