How much would you bid for a $10 bill?

I have taught many negotiation classes over the years, and I continue to do so at my hospital. The attendees include students, doctors, and administrative people. It is a very interactive session, with several simulation exercises used to demonstrate some of the principles of the field.

I often present one game that is an auction. I offer to sell a $10 bill to the highest bidder. Here are the rules: Bids start at $1 and must go up in $1 increments. The winning bidder wins the $10 bill and pays me the amount of his/her bid. The second place bidder wins nothing but must also pay me the amount of his/her bid.

What do you think happens? Well, usually there are two bidders who have trouble stopping. The person in second place offers a new bid in the hope of being the higher bidder and getting the $10. Then, the other person, not wanting to pay money for no return, feels the same way. I think the highest price I have received over the years for the $10 was $24 (and $23), which netted me $37.

This game is illustrative of what happens during wars and lawsuits and other fruitless types of negotiations, where the parties lose track of their underlying interests and the value of the matter in question.

We only reached $14 (and $13) this week. Later, the "winner," one of our fine neurologists (and one of my soccer buddies), sent me this note:

Paul,

As a scientist, after the class yesterday, I immediately searched for explanations of what happened during the “Ten Dollar Auction” game. I had a particular interest in my behavior and the others’ reactions. I made significant revelations. The paradox of irrational decisions on rational choices worked perfectly.

I have found the following very interesting aspects and facts:

1. In the overwhelming majority of games, both the highest and second highest bidders will pay in excess of the amount the group is auctioning.
   

2. There are four major components of the players’ behavior:

• prospect of winning for a small upfront investment
• trapped near the $10 level by not wanting to lose the bid
• remaining consistent with the earlier commitment to avoid being judged foolish to enter the bidding war
• ego, competition, rivalry

3. Yesterday I think the limbic emotional part of my brain overruled my higher level cortical thinking driven by my academic high ego and soccer player-coach competitiveness.

The general lesson I learned from this game and from my search is the following:

1. Ego and competitiveness in a competitive and adversarial environment leads to irrational escalation of commitment, which beyond the “Ten Dollar Auction Game” lessons has very important implications for organizational behavior.
   

2. According to Gregory P. Smith, international business consultant, this auction game is very effective for demonstrating the benefits of internal competition and the possible downsides of an adversarial environment.
   

3. While internal competition can generate enthusiasm and energy, cooperation can prevent the irrational escalation of commitments (bidding war). Maybe this is why high ego academic professors can not and should not run academic medical centers?

It was fun to learn so much.

Thank you.