Simply put, this can be illustrated by the 20 dollar auction popularized by a professor named Bazerman in his negotiations class at the Harvard Business School.
On the first day of class, he waves a 20 dollar bill and offers it up for auction. Everybody is free to bid and there are only 2 rules – first, the bids are to be made in 1 dollar increments. And second, the winner of the auction wins the bill but the runner-up must pay for his/her bid, while receiving nothing in return.
At the beginning of every auction, hands quickly shoot up until the bidding reaches about 12 to 16 dollars - when it becomes clear to the participants that at this point, they’re not the only ones who want to buy the 20 dollars for cheap. Most get jittery and stop bidding. Only the 2 highest bidders are left in the auction.
One bidder bids 16 dollars, the other tops if off with a 17 dollar bid. The other not wanting to suffer a 16 dollar loss bids 18 dollars. The other, not also wanting to pay real money for nothing bids 19 dollars. Both the bidders start playing not to lose and the bidding continues past 20 dollars!
From a rational perspective, the 2 bidders should already stop the bidding when it goes beyond 20 dollars and just accept the losses but they are pulled by the commitment to play not to lose and the looming loss if they back down. The 2 forces feed on each other. By playing not to lose, additional bids are made, but each bid drives the price up, making the potential loss bigger! And guess what the highest bidder on record for a 20 dollar bill? 204 dollars! Whoa, 10 times of what its real value is! Crazy, huh? The same swaying results happen whether the auction is conducted among students or business executives.
So the next time you find yourself in a situation where you clearly know it’s not working or not going anywhere, just think about the 20 dollar auction. :)
