Unknown auction theory

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I had to laugh at an article in the Fairfax press on strategies for home auctions. The authors contacted some mathematicians to ask about whether there was any theory about such auctions.

Even the head of applied mathematics at the University of NSW, Professor Vaithilingam Jeyakumar, says it would be beyond most of the world’s experts in the field. “I’m not aware of any work having been done on this kind of application of game theory,” he says.

Sorry Prof, but please go and talk to some of the people in your economics department. The analysis of house auctions (formally English open auctions) is well known. For independent private values the dominant strategy is to bid up to your own value and then drop out. This still holds if the house has a ‘common value’ and ‘private value’ element but there is no private information about the common value. If there is private information about the common value then life becomes more interesting as it is possible to learn through the bidding process.

This is pretty much standard first year graduate student stuff – and is often introduced in advanced undergrad courses.

Even better was the comment from “scientist and science commentator Dr Karl Kruszelnicki” who

feels it is too “deep a topic” to give an easy answer. “It would take me hours to work that out,” he says.

Good to know that it would only take him ‘hours’ to work out the last 50 years of auction theory including the stuff that won William Vickery the 1996 Nobel Prize in Economics! But wait – sometimes common sense prevails where formalism fails:

There’s one rule for those going into an auction to buy a house or apartment, says the ABC’s expert election commentator, Antony Green. “Work out before you go what the value of the property is and don’t go over that,” he says. “No one should pay more than it’s really worth. That’s not rational.”

8 Responses to "Unknown auction theory"
  1. The dumb journalist didn’t find the right person to speak to before his/her deadline.  Not really news, but one of those mathematicans and science commentators should have pointed the journo in the right direction.

  2. As a former UNSW student, taking a double degree with majors in both economics and mathematics, I’m not surprised by the response from Prof J. Just about the only complaint from my time there was that there is next to no communication or collaboration between the two schools. In fact, in some individual cases, the relationship between the two departments was quite bad.
    A maths prof (since retired) once remarked to me “I’ll take the School of Economics seriously when they start teaching and working 5 days a week”

  3. stupidly harsh on Dr Karl. Perhaps the hours of working it out would include researching current literature? or are you claiming he works everything out from first principles, every time?

  4. If people think there is private information on the common value (which most people probably do, probably wrongly), best strategy might be to hand out flyers prior to the auction explaining winners curse.

  5. Maybe Dave, though plenty of private ‘status’ value in investment properties.  I was just saying probably not much private information about what the common value is. Everyone has the same stats on recent sales etc.  Yet I think people probably think there is such private information and they would be weary of winners curse. Just a theory.

  6. Once one has conducted over a thousand auction sales, one may have some deep knowledge of auctions.

    Below that number one engages in mere speculation.

    Show me an economist who has done that. Vernon Smith, Shyam Sunder & Gode are possibilities. 

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