In their free time, Martin Shubik and colleagues at RAND and Princeton tried to devise new and unusual games. According to Shubik, the central question was, “Can we get certain pathological phenomena as well-defined games?” They wanted games you could actually play. “I don’t believe any game that can’t be played as a parlor game,” Shubik told me.
In 1950, Shubik, John Nash, Lloyd Shapley, and Melvin Hausner invented a game called “so long sucker.” This is a vicious game, played with poker chips, where players have to forge alliances with other players but usually have to betray them to win. When tried out at parties, people took the game seriously. (“We had married couples going home in separate cabs,” Shubik recalls.)
Shubik posed the question of whether it was possible to incorporate addiction in a game. This question lead to the dollar auction. Shubik is uncertain who thought of the game first or whether it was a collaboration. In any case, Shubik published it in 1971 and is generally credited as the game’s inventor.
The dollar auction is a non-zero sum sequential game designed by economist Martin Shubik to illustrate a paradox brought about by traditional rational choice theory in which players with perfect information in the game are compelled to make an ultimately irrational decision based completely on a sequence of rational choices made throughout the game.
The setup involves an auctioneer who volunteers to auction-off a dollar bill with the following rule: the bill goes to the winner; however, the two highest bidders must pay the highest amount they bid. The winner can get a dollar for a mere five cents, but only if no one else enters into the bidding war. The second-highest bidder is the biggest loser by paying the top amount he or she bid without getting anything back. The game begins with one of the players bidding five cents (the minimum), hoping to make a ninety-five-cent profit. He can be outbid by another player bidding ten cents, as a ninety-cent profit is still desirable. Similarly, another bidder may bid fifteen cents, making an eighty-five-cent profit. Meanwhile, the second bidder may attempt to convert his loss of ten cents into a gain of eighty cents by bidding twenty cents, and so on. Every player has a choice of either paying for nothing or bidding five cents more on the dollar. Any bid beyond the value of a dollar is a loss for all bidders alike. A series of rational bids will reach and ultimately surpass one dollar as the bidders seek to minimize their losses. If the first bidder bids ninety five cents, and the second bidder bids one dollar (for no net gain or loss), the first bidder stands to lose ninety five cents unless he bids $1.05, in which case he rationally bids more than the value of the item for sale (the dollar) in order to reduce his losses to only five cents. Bidding continues with the second highest bidder always losing more than the highest bidder and therefore always trying to become the high bidder. Only the auctioneer gets to profit in the end.
- Shubik, Martin (1971). “The Dollar Auction Game: A Paradox in Noncooperative Behavior and Escalation” (PDF file, direct download 274 KB). Journal of Conflict Resolution15 (1): 109–111. doi:10.1177/002200277101500111.
- Poundstone, William (1993). “The Dollar Auction”. Prisoner’s Dilemma: John Von Neumann, Game Theory, and the Puzzle of the Bomb. New York: Oxford University Press.ISBN 0-19-286162-X.