While studying at Harvard Business School, one of my professors presented a simple auction that produces stunning results. The auction was for a standard US $100 note and the rules are simple.
$100 Auction Rules
- Silence is in effect (to prevent side agreements and coalitions forming)
- Real money (both bids and winnings)
- The first bid must be $5, and bids go up $5 at a time
- You cannot bid twice in a row
- Highest bidder pays their bid and gets the $100
- Second-highest bidder pays their bid and gets nothing in return
Where do you think the bidding finished?
I should note that the Harvard classroom comprised smart individuals including CEOs, senior managers, physicists, aeronautical engineers, investment bankers, asset managers, etc.
So, where did the bidding finish? US$240. If you calculate the numbers, the professor sold a $100 bill for $240 and made $375 ($240 – $100 + $235) in a few minutes. We later learned that the professor’s average highest bid for this auction is between $200 and $500, and has at times exceeded $2000.
If you find yourself at a function with at least 8 – 10 people, give this experiment a try and see the results.