second-price auction

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pages: 298 words: 43,745

Understanding Sponsored Search: Core Elements of Keyword Advertising by Jim Jansen

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AltaVista, barriers to entry, Black Swan, bounce rate, business intelligence, butterfly effect, call centre, Claude Shannon: information theory, complexity theory, correlation does not imply causation, en.wikipedia.org, first-price auction, information retrieval, inventory management, life extension, linear programming, megacity, Nash equilibrium, Network effects, PageRank, place-making, price mechanism, psychological pricing, random walk, Schrödinger's Cat, sealed-bid auction, search engine result page, second-price auction, second-price sealed-bid, sentiment analysis, social web, software as a service, stochastic process, telemarketer, the market place, The Present Situation in Quantum Mechanics, the scientific method, The Wisdom of Crowds, Vickrey auction, yield management

In classic auction theory, the participants are interested in maximizing their own situation without considering others [9]. Auction theory research has lead to the development of several auction formats or types of auction markets. The format that we are most interested in is the Generalized Second Price auction and its poster-child auction, the Vickrey auction, as well as the generalized form, the Vickrey-Clarke-Groves auction. Potpourri: Google AdWords was the first sponsored-search platform that utilized the format now known as Generalized Second Price auction. The Serious Game of Bidding 181 The Generalized Second Price auction quickly became the standard for keyword auctions, with an amazingly broad impact on the Web and e-commerce. Although Hal Varian, the first Google chief economist, is best known as the face of Google AdWords, the credit for developing the Google AdWords system goes to Salar Kamangar, the ninth employee at Google, and Eric Veach, another early Google employee and Distinguished Engineer.

This is the basis for the Generalized Second Price auction, which is one of the sponsored search’s most famous auction implementations. Recall that the search engine is the auctioneer, and the advertisers are also paying the search engine, as the search engine is also the seller of the resource (i.e., keyphrases). So, why would a search engine use the Generalized Second Price approach? It would seem in the Generalized Second Price auction that the search engine is getting 188 Understanding Sponsored Search less revenue because it is not getting the best price per keyword. Certainly the search engines would like to receive the highest price possible, just as the advertisers would like to pay the lowest price possible. However, the Generalized Second Price auction offers some advantages to both the search engine and the advertisers, which make it an attractive model for an auction.

Google’s first sponsored-search auction was in February 2002, adopting Overture’s pay-per-click revenue model, but they continued their sales-by-impression model in parallel [12] before finally dropping it altogether in favor of the pay-per-click model. Additionally, Google’s sponsored-search model was introduced with some significant changes relative to the Overture model. First, developers of Google’s AdWords platform changed the pricing scheme from a first-price auction to a more stable second-price auction. In a single-item second-price auction, the highest bidder wins but only pays the second-highest bid price plus some small delta, which is a fancy word for additional amount. (Note: We’ll discuss the significance of this in Chapter 8 where we cover bidding practices.) Second, Google also changed the standard allocation scheme. Instead of ranking advertisements by bid price alone, they computed a quality score derived from the bid amount and the click-through rate.


pages: 252 words: 73,131

The Inner Lives of Markets: How People Shape Them—And They Shape Us by Tim Sullivan

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Airbnb, airport security, Al Roth, Andrei Shleifer, attribution theory, autonomous vehicles, barriers to entry, Brownian motion, centralized clearinghouse, clean water, conceptual framework, constrained optimization, continuous double auction, deferred acceptance, Donald Trump, Edward Glaeser, experimental subject, first-price auction, framing effect, frictionless, fundamental attribution error, George Akerlof, Goldman Sachs: Vampire Squid, helicopter parent, Internet of things, invisible hand, Isaac Newton, iterative process, Jean Tirole, Jeff Bezos, Johann Wolfgang von Goethe, John Nash: game theory, John von Neumann, Joseph Schumpeter, late fees, linear programming, Lyft, market clearing, market design, market friction, medical residency, multi-sided market, mutually assured destruction, Nash equilibrium, Occupy movement, Peter Thiel, pets.com, pez dispenser, pre–internet, price mechanism, price stability, prisoner's dilemma, profit motive, proxy bid, RAND corporation, ride hailing / ride sharing, Robert Shiller, Robert Shiller, Ronald Coase, school choice, school vouchers, sealed-bid auction, second-price auction, second-price sealed-bid, sharing economy, Silicon Valley, spectrum auction, Steve Jobs, Tacoma Narrows Bridge, technoutopianism, telemarketer, The Market for Lemons, The Wisdom of Crowds, Thomas Malthus, Thorstein Veblen, trade route, transaction costs, two-sided market, uranium enrichment, Vickrey auction, winner-take-all economy

If MLB management knew about William Vickrey, perhaps the Japanese posting system wouldn’t have been in crisis. You might have the impression that the seller makes out badly in a second-price auction. After all, in using a first-price rather than second-price auction for the sale of Dice-K’s contract, it looks like Boston’s loss is the Seibu Lion’s gain: an extra $20,111,111.11 to be exact. But this fails to account for the fact that all teams might have bid more aggressively if they’d known that they would be paying the second highest bid if they won, rather than their own. That is, the auction rules change the bids that come in, and one of the points of a second-price auction is that it makes for higher bidding. Besides, it was concerns about overpayment that led to the crisis in the posting system in the first place: if the auction system breaks down completely, it isn’t good for anyone.7 Johann Wolfgang von Goethe, Amateur Auction Theorist It turned out that stamp collectors weren’t even the first to beat economists to the Vickrey auction.

Uber just wants to reequilibrate supply and demand in real time to let markets clear—to make sure supply meets demand—by the minute. 7. A classic result in auction theory, the Revenue Equivalence Theorem, shows that, with appropriate assumptions on buyer and seller attributes like risk preferences, first- and second-price auctions can be expected to generate the same revenues for the seller, on average. Essentially, bidders in a first-price auction will shave their bids by “just enough” so that on average the amount paid to the seller is about the same. Sometimes it’ll be higher under a second-price auction, sometimes lower, but over time it’ll even out such that the choice between the two is, in theory, irrelevant. 8. This is a major issue in the design of broadband auctions, which sell internet bandwidth to cable and internet companies. In such scenarios it’s useful for a single party to assemble a bundle of spectrum rights because, for example, it’s only valuable to have the rights to a given spectrum band in Trenton if you also get it in nearby Newark.

Vickrey’s classic auction study similarly began with a precise explanation of what was wrong with the standard first-price sealed-bid auction that was standard practice in procurement auctions for everything from highways to school supplies, the same mechanism that was used to sell Matsuzaka’s contract. By the time he was done, he’d unwittingly reinvented the stamp collectors’ auction of choice and laid the foundations for the field of auction design in the process. Vickrey described what he thought was a better way: the second-price sealed-bid auction, which is now known simply as a Vickrey auction. Then he proved mathematically that it just might be the best of all possible auctions that one could devise. He changed the auction industry from one that relied on an ad hoc choice of format to one built on design and optimization—a microcosm of economists’ larger role in society. Bidding What You’re Willing to Pay It seems such a small tweak to the way a sealed-bid auction is run: the high bidder pays the runner-up price rather than his own.


pages: 282 words: 80,907

Who Gets What — and Why: The New Economics of Matchmaking and Market Design by Alvin E. Roth

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Affordable Care Act / Obamacare, Airbnb, algorithmic trading, barriers to entry, Berlin Wall, bitcoin, Build a better mousetrap, centralized clearinghouse, computer age, crowdsourcing, deferred acceptance, desegregation, experimental economics, first-price auction, Flash crash, High speed trading, income inequality, Internet of things, invention of agriculture, invisible hand, Jean Tirole, law of one price, Lyft, market clearing, market design, medical residency, obamacare, proxy bid, road to serfdom, school choice, sealed-bid auction, second-price auction, second-price sealed-bid, Silicon Valley, spectrum auction, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, The Wealth of Nations by Adam Smith, two-sided market

So it’s safe to bid your true value in a second-price auction of this kind, since you can’t do better by bidding anything else. Notice that while a second-price auction makes it safe for bidders to bid the true value to them, it doesn’t necessarily impose a cost on the seller, even though the seller receives only the amount of the second-highest bid. That’s because in a first-price sealed bid auction, for example, it isn’t safe for bidders to bid their true value; they have to bid less than that if they are going to make any profit, since if they win the auction, they will have to pay the full amount of their bid. So the seller in a first-price auction receives the amount of the highest bid, which is, however, less than the true value of the highest bidder. By comparison, in a second-price auction, the seller receives only the second-highest bid, but the bids are higher.

Sometimes items are sold instead in “sealed bid” auctions: each bidder submits a bid without hearing the other bids, the bids are all opened at the same time, and the highest bidder wins, sometimes paying the amount of his bid and sometimes paying the amount of the second- highest bid. Paying the second-highest bid may sound odd, until you notice that in an ascending bid auction, the winning bidder pays the price at which the second-highest bidder dropped out. So in both an ascending bid auction and a second-price sealed bid auction, the highest bidder gets the object at the price just beyond what the second-highest bidder was willing to pay. Both of those auction formats make it easy to decide how much to bid, if you know how much the object is worth to you. That’s because if you think of the winning bidder’s profit as what the object is worth to him minus what he has to pay for it (and each losing bidder’s profit as zero), it’s perfectly safe for bidders to bid the object’s full true value to them in a sealed bid auction, or to stay in an ascending bid auction until the auctioneer reaches the full amount they are willing to pay.

That’s because if you think of the winning bidder’s profit as what the object is worth to him minus what he has to pay for it (and each losing bidder’s profit as zero), it’s perfectly safe for bidders to bid the object’s full true value to them in a sealed bid auction, or to stay in an ascending bid auction until the auctioneer reaches the full amount they are willing to pay. Win or lose, a bidder can’t make a higher profit by bidding something else. That isn’t obvious at all, but if you think about it carefully, you’ll see why it’s true. Consider the second-price sealed bid auction, in which the high bidder receives the object and pays the second-highest bid, while the other bidders pay nothing and receive nothing. By bidding less than the object’s true value, a bidder sometimes turns a profitable winning bid into a losing one, and by bidding more than the true value, he sometimes turns a losing bid into an unprofitable winning bid at which he pays more than the object was worth to him.


pages: 324 words: 93,175

The Upside of Irrationality: The Unexpected Benefits of Defying Logic at Work and at Home by Dan Ariely

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Burning Man, business process, cognitive dissonance, corporate governance, Daniel Kahneman / Amos Tversky, endowment effect, Exxon Valdez, first-price auction, Frederick Winslow Taylor, George Akerlof, happiness index / gross national happiness, Jean Tirole, job satisfaction, knowledge economy, knowledge worker, loss aversion, Peter Singer: altruism, placebo effect, Richard Thaler, Saturday Night Live, second-price auction, software as a service, The Wealth of Nations by Adam Smith, ultimatum game, Upton Sinclair, young professional

To find out, we compared the results of two different bidding procedures called first-price and second-price auctions. Without going too much into the technical differences,* if you were bidding using a second-price bidding procedure, you should carefully consider only how much you value your little paper creature.* In contrast, if you were bidding using a first-price bidding procedure, you should take into consideration both your own love for the object and how much you think others will bid for it. Why do we need this complexity? Here is the logic: if the creators realized that they were uniquely overimpressed with their own frogs and cranes, they would bid more when using the second-price auction (when only their value matters) than when using the first-price auction (when they should also take into account the values of others).

In contrast, if the creators did not realize that they were the only ones who overvalued their origami and they thought that others shared their perspective, they would bid a similarly high amount in both bidding procedures. So did the origami builders understand that others didn’t see their creations as they did? We found that creators bid the same amount when they considered only their own evaluation for the product (second-price auction) as when they also considered what noncreators would bid for it (first-price auction). The lack of difference between the two bidding approaches suggested not only that we overvalue our own creations but also that we are largely unaware of this tendency; we mistakenly think that others love our work as much as we do. The Importance of Completion Our experiments on creation and overvaluation reminded me of some skills I acquired while I was in the hospital.

., 257, 261, 279 effects far into future of, 262–64 regret for, 257 romantic relationships and, 277–78 negative feelings, anterior insula activity and, 266–67 Neistat brothers, 141–42 Nelson, Leif, 177–80, 181n new houses, hedonic adaptation to, 168–69 New Yorker, 120 New York Times, 110, 116 9/11 terrorist attacks, 250, 251 Norton, Mike, 89, 90, 102, 220, 303 Not-Invented-Here (NIH) bias, 107–22 acronyms and, 120 Edison’s belief in superiority of DC electricity and, 117–19 effort expended and, 114–16 FedEx commercial and, 108–9 idiosyncratic fit and, 111–12 IKEA effect and, 109–10, 121 objective merits of ideas and, 111–12, 117 organizational cultures and, 119–21 ownership component of, 111–16 practical implications of, 121–22 in scientific research, 117 at Sony, 120–21 Twain’s essay and, 107–8, 116 world problems experiment and, 109–16 O obesity epidemic, 8 older adults, speed dating for, 229 online dating, 215–35 improving mechanisms for, 224–30 learning from market failure of, 233–35 people reduced to searchable attributes in, 218–19, 221–22, 230 process of, 217–18 regular dating compared to, 224–25, 227–28 Scott’s story and, 222–24 shortcomings of, 220–21, 230–32, 233–35 studies on participants’ experiences with, 220–22 taking human limitations into account in design of, 230–32 virtual dating approach and, 225–30, 231 ways consumers can improve experience of, 232 Open Left, 128–29 Opposition, 154 origami experiments, 91–94, 97 with element of failure, 102–4 with first-price vs. second-price auctions, 98–99 outsourcing, 146 overvaluation: of one’s own ideas, see Not-Invented-Here (NIH) bias of self-made goods, see IKEA effect P Packing Quarters puzzle, 22–23 pain, 160–67 of battlefield vs. civilian injuries, 167 of disease vs. injury, 165–67 experiments on thresholds and tolerance for, 161–65 gender differences and, 168–69 paraplegics, hedonic adaptation of, 170 in future, foreseeing of, 160, 171 Parkinson’s disease, 254 past-based decision making, 262–64, 271–74 see also self-herding Paulsen, Henry, 128 Pelosi, Nancy, 128 personal experiences, speaking about, 43 phone call interruption experiments, 135–39 agent-principal distinction and, 145–46 apology condition added to, 150–51 physicians: apologizing of, 152 received wisdom and, 289–92 Pillsbury, 86 playing hard to get, 104 pleasurable experiences, slowing down adaptation to, 176–78, 179–81, 185, 186 pleasure, elicited by punishment, 124–26 Potok, Andrew, 172–74 Prelec, Dražen, 66, 259–60, 303 preventative health care, 251, 256 pride of creation and ownership: ideas and, see Not-Invented-Here (NIH) bias self-made goods and, see IKEA effect procrastination, 1–5 long-term objectives vs. short-term enjoyments and, 4–5 medical side effects and, 1–5 rational economics and, 5–6 proximity to victim, empathy and, 243, 245 public policy, experimental approach to, 292–94, 295 public speaking, 42–43 punishment, 266 animals’ urge for, 126–27 pleasure elicited by, 124–26 R “Ransom of Red Chief, The” (Henry), 98 rational economics, 5–6 trust game and, 125, 127 ultimatum game and, 266, 267 rationalization, 287 Recall Last Three Numbers game, 23, 34 relaxation, enjoyment derived from effort vs., 105–6 restaurants, revenge for bad service in, 144–45 retirement calculators, online, 233 revenge, 123–54 animals’ urge to punish and, 126–27 apologies and, 149–51, 152 desire for, in wake of financial meltdown of 2008, 128–31 opportunities for, in daily life, 139 outlets for feelings of, 153 as part of human nature, 123–26, 153 passage of time and, 151, 153 pleasure of punishment and, 124–26 success stories built on motivation for, 154 threat of, as effective enforcement mechanism, 124 revenge (cont.)

The Armchair Economist: Economics and Everyday Life by Steven E. Landsburg

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Albert Einstein, Arthur Eddington, diversified portfolio, first-price auction, German hyperinflation, Golden Gate Park, invisible hand, means of production, price discrimination, profit maximization, Ralph Nader, random walk, Ronald Coase, sealed-bid auction, second-price auction, second-price sealed-bid, statistical model, the scientific method, Unsafe at Any Speed

Because bidders are unlikely to reveal their bidding strategies in advance of the auction, the seller can never know for certain on any given night whether an English auction is preferable to, say, a Dutch auction. Even to decide between a first-price and a second-price sealed bid auction can be difficult for the seller. On the one hand, in a first-price auction he collects the high bid, while in a second-price auction he collects only the amount of the second-highest bid. On the other hand, bidders generally submit higher bids in a second-price auction. They submit even higher bids in a third-price auction. Which is best for the seller? Again the answer depends on who shows up to bid, and what the bidders' strategies are. Given his limited information, the seller is in no position to choose the rule that will maximize the selling price at any one auction.

The most familiar is the common English auction, where bidders offer successively higher prices and drop out until only one remains. There is the Dutch auction, where an auctioneer calls out a very high price and successively lowers it until he receives an offer to buy. There is the first-price sealed bid auction, where each buyer submits a bid in an envelope, all are opened simultaneously, and the high bidder gets the item for the amount of his bid. There is the second-price sealed bid auction, where the high bidder gets the item but pays only the amount of the second-highest bid. There are third-, fourth-, and fifth-price sealed bid auctions. And there are more exotic possibilities. In the Glum Losers auction, the high bidder gets the item for free and everybody else pays the amount of his own bid. The seller can choose among these or any other rules that he manages to dream up.

At this point, economic theory makes its entrance, to announce an astonishing truth. Under certain reasonable assumptions (about which I will soon say more), and as a matter of mathematical fact, all of the auction rules I've mentioned yield the same revenue to the seller on average over many auctions. If I regularly sell merchandise at English auctions, while you sell at Dutch auctions, your brother sells at first-price sealed bid auctions, your sister sells at second-price sealed bid auctions, and your crazy Uncle Fester sells at Glum Losers auctions, and if we all sell merchandise of comparable quality, then in the long run we must all do equally well. This result applies as well to a vast number of other auction rules—in fact, to any rule you can imagine that does not involve some entrance fee to the auction hall or its equivalent. I haven't told you how I know that sellers using vastly different rules all do equally well on average, because the argument is technical and I haven't yet figured out how to translate it into simple English.


pages: 350 words: 103,988

Reinventing the Bazaar: A Natural History of Markets by John McMillan

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accounting loophole / creative accounting, Albert Einstein, Andrei Shleifer, Anton Chekhov, Asian financial crisis, congestion charging, corporate governance, crony capitalism, Dava Sobel, Deng Xiaoping, experimental economics, experimental subject, fear of failure, first-price auction, frictionless, frictionless market, George Akerlof, George Gilder, global village, Hernando de Soto, I think there is a world market for maybe five computers, income inequality, income per capita, informal economy, invisible hand, Isaac Newton, job-hopping, John Harrison: Longitude, John von Neumann, land reform, lone genius, manufacturing employment, market clearing, market design, market friction, market microstructure, means of production, Network effects, new economy, offshore financial centre, pez dispenser, pre–internet, price mechanism, profit maximization, profit motive, proxy bid, purchasing power parity, Ronald Coase, Ronald Reagan, sealed-bid auction, second-price auction, Silicon Valley, spectrum auction, Stewart Brand, The Market for Lemons, The Nature of the Firm, The Wealth of Nations by Adam Smith, trade liberalization, transaction costs, War on Poverty, Xiaogang Anhui farmers, yield management

An alternative way of running the bidding is the Dutch auction, used to sell flowers at Aalsmeer, in which the price starts high and falls until a bidder claims the item. Another is the sealed-bid auction, in which there is a single round of sealed bids; the high bidder wins and pays his or her bid. Commercial real estate is sometimes sold this way. A variant is the second-price auction, in which there is a single round of bidding and the high bidder wins, but unlike first-price auctions, the price paid is the second-highest bid. Second-price auctions are used for selling stamps. eBay chose open auctions. Economic theory endorses this decision: the open auction yields, on average, a price that is closer to the item’s true value than do the other forms of auction.3 This is because bidders have more information in an open auction. If you win, the level of your winning bid reflects others’ bids as well your own prior estimate of the item’s value.

“The Evolution of the Labor Market for Medical Interns and Residents.” Journal of Political Economy 92, 991–1016. ————. 1996. “Report on the Design and Testing of an Applicant Proposing Matching Algorithm, and Comparison with the Existing NPRM Algorithm.” www.economics.harvard.edu/~aroth/phase1.html. Roth, Alvin E., and Ockenfels, Axel. 2000. “Last Minute Bidding and the Rules for Ending Second-Price Auctions.” Unpublished, Harvard University, Cambridge. Roth, Alvin E., and Peranson, Elliot. 1999. “A Redesign of the Matching Market for American Physicians: Some Engineering Aspects of Economic Design.” American Economic Review 89, 748–780. Roth, Alvin E., Prasnikar, Vesna, Okuno-Fujiwara, Masahiro, and Zamir, Shmuel. 1991. “Bargaining and Market Behavior in Jerusalem, Ljubljana, Pittsburgh, and Tokyo: An Experimental Study.”


pages: 898 words: 266,274

The Irrational Bundle by Dan Ariely

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accounting loophole / creative accounting, air freight, Albert Einstein, banking crisis, Bernie Madoff, Black Swan, Broken windows theory, Burning Man, business process, cashless society, Cass Sunstein, clean water, cognitive dissonance, computer vision, corporate governance, credit crunch, Credit Default Swap, Daniel Kahneman / Amos Tversky, delayed gratification, Donald Trump, endowment effect, Exxon Valdez, first-price auction, Frederick Winslow Taylor, fudge factor, George Akerlof, Gordon Gekko, greed is good, happiness index / gross national happiness, Jean Tirole, job satisfaction, knowledge economy, knowledge worker, lake wobegon effect, late fees, loss aversion, Murray Gell-Mann, new economy, Peter Singer: altruism, placebo effect, price anchoring, Richard Feynman, Richard Feynman, Richard Thaler, Saturday Night Live, Schrödinger's Cat, second-price auction, shareholder value, Silicon Valley, Skype, software as a service, Steve Jobs, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, ultimatum game, Upton Sinclair, Walter Mischel, young professional

To find out, we compared the results of two different bidding procedures called first-price and second-price auctions. Without going too much into the technical differences,* if you were bidding using a second-price bidding procedure, you should carefully consider only how much you value your little paper creature.* In contrast, if you were bidding using a first-price bidding procedure, you should take into consideration both your own love for the object and how much you think others will bid for it. Why do we need this complexity? Here is the logic: if the creators realized that they were uniquely overimpressed with their own frogs and cranes, they would bid more when using the second-price auction (when only their value matters) than when using the first-price auction (when they should also take into account the values of others).

In contrast, if the creators did not realize that they were the only ones who overvalued their origami and they thought that others shared their perspective, they would bid a similarly high amount in both bidding procedures. So did the origami builders understand that others didn’t see their creations as they did? We found that creators bid the same amount when they considered only their own evaluation for the product (second-price auction) as when they also considered what noncreators would bid for it (first-price auction). The lack of difference between the two bidding approaches suggested not only that we overvalue our own creations but also that we are largely unaware of this tendency; we mistakenly think that others love our work as much as we do. The Importance of Completion Our experiments on creation and overvaluation reminded me of some skills I acquired while I was in the hospital.

., 257, 261, 279 effects far into future of, 262–64 regret for, 257 romantic relationships and, 277–78 negative feelings, anterior insula activity and, 266–67 Neistat brothers, 141–42 Nelson, Leif, 177–80, 181n new houses, hedonic adaptation to, 168–69 New Yorker, 120 New York Times, 110, 116 9/11 terrorist attacks, 250, 251 Norton, Mike, 89, 90, 102, 220, 303 Not-Invented-Here (NIH) bias, 107–22 acronyms and, 120 Edison’s belief in superiority of DC electricity and, 117–19 effort expended and, 114–16 FedEx commercial and, 108–9 idiosyncratic fit and, 111–12 IKEA effect and, 109–10, 121 objective merits of ideas and, 111–12, 117 organizational cultures and, 119–21 ownership component of, 111–16 practical implications of, 121–22 in scientific research, 117 at Sony, 120–21 Twain’s essay and, 107–8, 116 world problems experiment and, 109–16 O obesity epidemic, 8 older adults, speed dating for, 229 online dating, 215–35 improving mechanisms for, 224–30 learning from market failure of, 233–35 people reduced to searchable attributes in, 218–19, 221–22, 230 process of, 217–18 regular dating compared to, 224–25, 227–28 Scott’s story and, 222–24 shortcomings of, 220–21, 230–32, 233–35 studies on participants’ experiences with, 220–22 taking human limitations into account in design of, 230–32 virtual dating approach and, 225–30, 231 ways consumers can improve experience of, 232 Open Left, 128–29 Opposition, 154 origami experiments, 91–94, 97 with element of failure, 102–4 with first-price vs. second-price auctions, 98–99 outsourcing, 146 overvaluation: of one’s own ideas, see Not-Invented-Here (NIH) bias of self-made goods, see IKEA effect P Packing Quarters puzzle, 22–23 pain, 160–67 of battlefield vs. civilian injuries, 167 of disease vs. injury, 165–67 experiments on thresholds and tolerance for, 161–65 gender differences and, 168–69 paraplegics, hedonic adaptation of, 170 in future, foreseeing of, 160, 171 Parkinson’s disease, 254 past-based decision making, 262–64, 271–74 see also self-herding Paulsen, Henry, 128 Pelosi, Nancy, 128 personal experiences, speaking about, 43 phone call interruption experiments, 135–39 agent-principal distinction and, 145–46 apology condition added to, 150–51 physicians: apologizing of, 152 received wisdom and, 289–92 Pillsbury, 86 playing hard to get, 104 pleasurable experiences, slowing down adaptation to, 176–78, 179–81, 185, 186 pleasure, elicited by punishment, 124–26 Potok, Andrew, 172–74 Prelec, Dražen, 66, 259–60, 303 preventative health care, 251, 256 pride of creation and ownership: ideas and, see Not-Invented-Here (NIH) bias self-made goods and, see IKEA effect procrastination, 1–5 long-term objectives vs. short-term enjoyments and, 4–5 medical side effects and, 1–5 rational economics and, 5–6 proximity to victim, empathy and, 243, 245 public policy, experimental approach to, 292–94, 295 public speaking, 42–43 punishment, 266 animals’ urge for, 126–27 pleasure elicited by, 124–26 R “Ransom of Red Chief, The” (Henry), 98 rational economics, 5–6 trust game and, 125, 127 ultimatum game and, 266, 267 rationalization, 287 Recall Last Three Numbers game, 23, 34 relaxation, enjoyment derived from effort vs., 105–6 restaurants, revenge for bad service in, 144–45 retirement calculators, online, 233 revenge, 123–54 animals’ urge to punish and, 126–27 apologies and, 149–51, 152 desire for, in wake of financial meltdown of 2008, 128–31 opportunities for, in daily life, 139 outlets for feelings of, 153 as part of human nature, 123–26, 153 passage of time and, 151, 153 pleasure of punishment and, 124–26 success stories built on motivation for, 154 threat of, as effective enforcement mechanism, 124 revenge (cont.)


pages: 383 words: 108,266

Predictably Irrational, Revised and Expanded Edition: The Hidden Forces That Shape Our Decisions by Dan Ariely

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air freight, Al Roth, Bernie Madoff, Burning Man, butterfly effect, Cass Sunstein, collateralized debt obligation, computer vision, corporate governance, credit crunch, Daniel Kahneman / Amos Tversky, David Brooks, delayed gratification, endowment effect, financial innovation, fudge factor, Gordon Gekko, greed is good, housing crisis, invisible hand, lake wobegon effect, late fees, loss aversion, market bubble, Murray Gell-Mann, payday loans, placebo effect, price anchoring, Richard Thaler, second-price auction, Silicon Valley, Skype, The Wealth of Nations by Adam Smith, Upton Sinclair

approach to dining with friends in, 248–50 with lines to get in, 36, 37 menu pricing of, 4 ordering in, 231–38; see also ordering food or drinks social norms of dating and, 75–76 retirement, saving for, xiii from perspective of standard economics vs. behavioral economics, 241 revenge, 307–9 as enforcement mechanism, 309 pleasure of, 307–8 rewards: delayed gratification and, 261–64 financial, job performance and, 320–21 reinforcement schedules and, 257–58 unpredictable, learned helplessness and, 312–16 see also bonuses robberies, 195 romantic relationships: options in, 142, 148, 150 separation of social and market norms and, 69, 75–76, 250 see also dating Roth, Al, xviii royal touch, 188 Rustichini, Aldo, 76–77 S safe sex, 100–102 and willingness to engage in unprotected sex when aroused, 89, 95, 96–97, 99, 107 salaries, 16–19, 88 of bankers, calculating right amount of, 319–24 of CEOs, 16–17, 18, 310 co-workers’ comparisons of, 16 excessive, erosion of public trust and, 310, 311 executive, public outcry over, 306, 310, 311, 319–20 happiness and, 17–18 and move from hourly rates to monthly pay, 80 performance-based, in education, 85 relinquishing dreams for increase in, 18–19 “save more tomorrow” mechanism and, 242 willingness to risk life and, 84 see also bonuses; compensation sale prices, 148–49 relativity and, 19–20 Sarbanes-Oxley Act of 2002, 204, 205–6 savings, 109–11 decline in rate of, 109–10 defeating procrastination in, 122–26 401(k)s and, xiii planning fallacy and, 303–4 for retirement, from perspective of standard economics vs. behavioral economics, 241 “save more tomorrow” mechanism and, 242 self-control credit card and, 123–26 Sawyer, Tom, 24–25, 39–40, 42–43 Schmalensee, Richard, 92 schools: soda machines at, 204 see also education second price auctions, 28n Securities and Exchange Commission (SEC), 205 self-control, 109–26, 255–65 credit cards and, 123–26 decline in savings rate and, 109–10 e-mail and, 255–59 effectiveness of external voice and, 116–17 patient compliance and, 260–64 procrastination of university students and, 111–16 self-destructive behaviors, 264–65 government regulation and, 118 self-herding, 37–38 self-reliance, 68 thinking about money and, 74–75 self-shame, debt blogging and, 122–23 Seligman, Martin, 312-13 sensei (martial arts master), offering pay to, 71–72 Seven Pounds, 255 sex: and likelihood of engaging in immoral behaviors, 94–95, 96, 97, 107 and preferences in “cold” vs. aroused state, 89, 94, 96, 97, 106 safe vs. unprotected, 89, 95, 96–97, 99, 100–102, 107 in social vs. market context, 68–69 as taboo subject for study, 92 sex education, 101 sexual arousal: decision making under, 89–102, 106–8 see also arousal Shakespeare, William, xxviii–xxix, 188, 232, 239–40 Shampanier, Kristina, 51, 339 Shin, Jiwoong, 142–43, 147, 339–40 Shin, Margaret, 169 shipping, FREE!

* Now that you know this fact, and assuming that you are not married, take this into account when you search for a soul mate. Look for someone whose sibling is married to a productivity-challenged individual. * Of course, physicians have other problems as well, including insurance forms, bureaucracy, and threats of lawsuits for malpractice. * The price the highest bidder paid for an item was based not on his own bid, but on that of the second highest bidder. This is called a second price auction. William Vickrey received the Nobel prize in economics for demonstrating that this type of auction creates the conditions where it is in people’s best interest to bid the maximum amount they are willing to pay for each item (this is also the general logic behind the auction system on eBay). † When I’ve tried this kind of experiment on executives and managers (at the MIT Executive Education Program), I’ve had similar success making their social security numbers influence the prices they were willing to pay for chocolates, books, and other products


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Website Optimization by Andrew B. King

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AltaVista, bounce rate, don't be evil, en.wikipedia.org, Firefox, In Cold Blood by Truman Capote, information retrieval, iterative process, medical malpractice, Network effects, performance metric, search engine result page, second-price auction, second-price sealed-bid, semantic web, Silicon Valley, slashdot, social graph, Steve Jobs, web application

Sometimes, though, if you get lucky, you will find a little change that makes a significant impact on conversion rates. Optimizing Bids PPC programs use an auction that is like a second-price sealed bidding system with private values. This means you do not know how much your competitors are bidding. Everyone has different bids for each keyword. Typically, people overbid in second-price auctions with private values. The larger the number of competing bidders and the more uncertain the value of what is being bid on, the more extreme the overbidding gets. A PPC auction is a little more complicated than a second-price auction because multiple positions are being bid on simultaneously and Quality Score factors affect rankings. The lesson from this is if you don't want to lose money, you need to figure out the value that keywords have for you. You do this, of course, by tracking conversions and determining a value per conversion.

If you'd rather be middle of the road, you should build up your account from a set of strong keywords and work from an initial budget calculation such as the one in "Differences in Minimum Bids and Quality Scoring," described earlier in this chapter. Using the numbers from "Closing the Loop," also earlier in this chapter, with a conversion rate of 6% and a value per conversion of $20, you will break even with a CPC of $1.20: ($20 / conversion * 6 conversions) / 100 clicks = $1.20 / click The dominant strategy in a second-price sealed auction is to set your maximum CPC to $1.20. However, in PPC, you are not bidding for one item. Your ad may show in a range of positions. Assuming that your conversion rates do not depend on position (a reasonable assumption), you will want to show your ad in lower positions if it brings roughly the same amount of traffic, because it will be cheaper. So, your decision about where to rank is more complicated and depends on the bids of your competitors.


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In the Plex: How Google Thinks, Works, and Shapes Our Lives by Steven Levy

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23andMe, AltaVista, Anne Wojcicki, Apple's 1984 Super Bowl advert, autonomous vehicles, book scanning, Brewster Kahle, Burning Man, business process, clean water, cloud computing, crowdsourcing, Dean Kamen, discounted cash flows, don't be evil, Douglas Engelbart, El Camino Real, fault tolerance, Firefox, Gerard Salton, Google bus, Google Chrome, Google Earth, Googley, HyperCard, hypertext link, IBM and the Holocaust, informal economy, information retrieval, Internet Archive, Jeff Bezos, Kevin Kelly, Mark Zuckerberg, Menlo Park, optical character recognition, PageRank, Paul Buchheit, Potemkin village, prediction markets, recommendation engine, risk tolerance, Sand Hill Road, Saturday Night Live, search inside the book, second-price auction, Silicon Valley, skunkworks, Skype, slashdot, social graph, social software, social web, spectrum auction, speech recognition, statistical model, Steve Ballmer, Steve Jobs, Steven Levy, Ted Nelson, telemarketer, trade route, traveling salesman, Vannevar Bush, web application, WikiLeaks, Y Combinator

Overture required its advertisers to pick specific keywords; Google would match an ad to many keywords, some of them with subtle connections discovered by analysis of the behavior of its millions of users. Overture concentrated on high-value accounts that it sold by hand. Google built a self-service system that allowed it to accommodate hundreds of thousands of advertisers. Overture did implement some of Google’s innovations, such as the second-price auction. But by then AdWords had left Overture and Yahoo in the dust. (Bill Gross would later shrug off the fact that his ideas involving pay per click and ad auctions had made billionaires at Google but not at Idealab. “I feel we won,” he says. “There was the satisfaction of breaking the code. We originally invested $200,000 in GoTo, and when we sold Overture, we made $200 million. That was a pretty great return.

That was a pretty great return. And we learned our lessons about patent protection.”) AdWords Select rolled out in February 2002. The AOL deal went into effect in May. Suddenly, Google’s financial crisis was over. Now Google had a cash cow that would fund the next decade’s worth of projects, from brilliant to lunatic. In 2007, writing about the “spectacular commercial success” of the second-price auction model, economists at Stanford, Harvard, and the University of California at Berkeley described it as “the dominant transaction mechanism in a large and rapidly growing industry.” Before AdWords Select and the AOL deal, Eric Schmidt often passed by Sheryl Sandberg’s cubicle and asked her how many advertisers Google had. “Not many,” she would say. Later in the day, he’d ask her the same question. “Eric,” she’d say, “not many more than we had three hours ago.”

Anderson (who is my editor at Wired) later wrote a best-selling book with the same title. 85 Yossi Vardi “Interview with Sergey Brin,” Haaretz.com, June 2, 2008. 90 So Veach devised I described the workings of Google’s ad model in “Secret of Googlenomics,” Wired, April 2009. 94 “That’s really satisfying” Brin told me this while I was researching “The World According to Google,” Newsweek, December 16, 2002. 95 Overture’s failures Flake presented his slide show, “How Google Won the Search Engine Wars,” at the Marketing 3.0 conference in New York City, April 25, 2009. 99 “the dominant transaction mechanism” Benjamin Edelman, Michael Ostrovsky, and Michael Schwarz, “Internet Advertising and the Generalized Second Price Auction: Selling Billions of Dollars Worth of Keywords,” American Economic Review, March 2007. 101 “many synergies” Amy Harmon, “Google Deal Ties Company to Weblogs,” The New York Times, February 17, 2003. 102 “The potential exists” Danny Sullivan, “Google Throws Hat into the Contextual Advertising Ring,” Search Engine Watch, March 4, 2003. 102 “We could change the economics” Wojcicki called me at Newsweek in 2003 to explain the product. 105 In 2008, a story Nicholas Carlson, “Google’s Worst Ads, Ever,” Business Insider, August 20, 2009. 106 In May 2010 Neal Mohan, “The AdSense Revenue Share,” Google Inside AdSense blog, May 24, 1010.


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I'm Feeling Lucky: The Confessions of Google Employee Number 59 by Douglas Edwards

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Albert Einstein, AltaVista, Any sufficiently advanced technology is indistinguishable from magic, barriers to entry, book scanning, Build a better mousetrap, Burning Man, business intelligence, call centre, crowdsourcing, don't be evil, Elon Musk, fault tolerance, Googley, gravity well, invisible hand, Jeff Bezos, job-hopping, Menlo Park, microcredit, music of the spheres, Network effects, P = NP, PageRank, performance metric, pets.com, Ralph Nader, risk tolerance, second-price auction, side project, Silicon Valley, Silicon Valley startup, slashdot, stem cell, Superbowl ad, Y2K

He envisioned an eBay-type auction where the advertiser would pay the minimum amount necessary to win a position in the rankings. Eric had never heard of William Vickrey, the Nobel laureate who had created a "second-price auction" model; he worked out the idea himself. It just made sense to him that instead of charging as much as an advertiser was willing to pay, we should automatically lower the cost to the minimum amount required. Then advertisers would have no incentive to lower their bids, but they would have an incentive to raise them when the bids below theirs increased. At first, Salar resisted the idea of a second-price auction, because it would confuse advertisers. They would have to trust us to lower their bids, and Salar wasn't sure they would be willing to do that. Eric saw a fundamental difference between his approach and Salar's.

Culture and Prosperity: The Truth About Markets - Why Some Nations Are Rich but Most Remain Poor by John Kay

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Albert Einstein, Asian financial crisis, Barry Marshall: ulcers, Berlin Wall, Big bang: deregulation of the City of London, California gold rush, complexity theory, computer age, constrained optimization, corporate governance, corporate social responsibility, correlation does not imply causation, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, Donald Trump, double entry bookkeeping, double helix, Edward Lloyd's coffeehouse, equity premium, Ernest Rutherford, European colonialism, experimental economics, Exxon Valdez, failed state, financial innovation, Francis Fukuyama: the end of history, George Akerlof, George Gilder, greed is good, haute couture, illegal immigration, income inequality, invention of the telephone, invention of the wheel, invisible hand, John Nash: game theory, John von Neumann, Kevin Kelly, knowledge economy, labour market flexibility, late capitalism, Long Term Capital Management, loss aversion, Mahatma Gandhi, market bubble, market clearing, market fundamentalism, means of production, Menlo Park, Mikhail Gorbachev, money: store of value / unit of account / medium of exchange, moral hazard, Naomi Klein, Nash equilibrium, new economy, oil shale / tar sands, oil shock, pets.com, popular electronics, price discrimination, price mechanism, prisoner's dilemma, profit maximization, purchasing power parity, QWERTY keyboard, Ralph Nader, RAND corporation, random walk, rent-seeking, risk tolerance, road to serfdom, Ronald Coase, Ronald Reagan, second-price auction, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, Steve Jobs, telemarketer, The Chicago School, The Death and Life of Great American Cities, The Market for Lemons, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, total factor productivity, transaction costs, tulip mania, urban decay, Washington Consensus, women in the workforce, yield curve, yield management

If the highest bid from anyone else is $80, then you will get the object for $80. If the highest outside bid is $110, you won't get the object, but you wouldn't have wanted to pay $110 for it anyway. A little time with pencil and paper will show that you can never lose by bidding your true valuation, but you { 102} John Kay might lose out if you enter a false value. Alone among bidding procedures, this "second-price auction" has the property of incentive compatibility: there is no benefit from strategic behavior. The mechanism sounds arcane and theoretical. It was proposed by an American economist, William Vickrey,n who received the Nobel Prize in 1996 for his analysis of this and similar problems. 18 But the Vickrey scheme is, in essence, the allocation mechanism that was used to decide what should be done with the Portrait ofDr.

., 116 Rousseau, Jean-Jacques, 242,247,253,290 Roux,Paul,85-86,89,90, 137,180,293 rule oflaw, 13, 75, 254, 352 rules, 73-82 Russia debt default (1998), 237 privatization in, 11, 13, 128, 288, 295, 306-7,319,344,355 See also Soviet Union Sachs, Jeffrey, 335 Samuelson, Paul, 179,210,324,330,335,359 San Remo flower market, 14, 146-48, 149, 151-52 Say,Jean-Baptiste, 174, 175, 179 Scherer, Mike, 334 Scholes, Myron, 159, 160-61, 237, 359 Scottish Enlightenment, 83, 126 "second-price auction," 102, 103 securities markets, 91, 92, 148 bonds, 50, 167-69 derivatives, 160-61, 237 and efficient market hypothesis, 236 "equity premium," 235 inception of, 55 investment strategy, 300 knowledge transmission, 270-71 speculation, 150, 151,341 traders' compensation, 321 valuation, 170-71 See also risk; stock markets self-interest, 11, 12-13, 16, 17, 20, 78, 127, 314,327,340 adaptive, 217, 252, 256, 343 American business model, 21, 62,313, 314-18,343-44 and cooperation, 247-48,250,253, 255-56,320 in politics, 12, 250-51 and redistributive market liberalism, 314-15 and Smith (Adam), 197-98 values of, 315-18,342,347 self-regarding materialism, 198,207,217, 315-18 expectation/achievement gap, 286,287 nonmaterialist motives vs., 320, 340 public goods vs., 248 rationality as, 210, 212, 219, 347 self-perpetuating, 216 social norms vs., 255 self-regulation, 349 Sen, Amartya, 327, 359 settlements.


pages: 209 words: 13,138

Empirical Market Microstructure: The Institutions, Economics and Econometrics of Securities Trading by Joel Hasbrouck

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barriers to entry, conceptual framework, correlation coefficient, discrete time, disintermediation, distributed generation, experimental economics, financial intermediation, index arbitrage, interest rate swap, inventory management, market clearing, market design, market friction, market microstructure, martingale, price discovery process, price discrimination, quantitative trading / quantitative finance, random walk, Richard Thaler, second-price auction, short selling, statistical model, stochastic process, stochastic volatility, transaction costs, two-sided market, ultimatum game

Ronen, Tavy, 1998, Trading structure and overnight information: A natural experiment from the Tel-Aviv Stock Exchange, Journal of Banking and Finance 22, 489–512. Ross, Sheldon M., 1996, Stochastic Processes (John Wiley, New York). Roth, Alvin E., 1995, Bargaining experiments, in John H. Kagel, and Alvin E. Roth, eds., The Handbook of Experimental Economics (Princeton University Press, Princeton, NJ). Roth, Alvin E., and Axel Ockenfels, 2002, Last-minute bidding and the rules for ending second-price auctions: Evidence from eBay and Amazon auctions on the internet, American Economic Review 92, 1093–103. Rubinstein, Ariel, 1982, Perfect equilibrium in a bargaining model, Econometrica 50, 97–110. Rust, John, John H. Miller, and Richard Palmer, 1993. Behavior of trading automata in a computerized double auction market, in Daniel Friedman, and John Rust, eds., The Double Auction Market Institutions, Theories and Evidence, Proceedings Volume XIV, Santa Fe Institute (Addison-Wesley, Reading, MA).


pages: 559 words: 155,372

Chaos Monkeys: Obscene Fortune and Random Failure in Silicon Valley by Antonio Garcia Martinez

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Airbnb, airport security, Amazon Web Services, Burning Man, Celtic Tiger, centralized clearinghouse, cognitive dissonance, collective bargaining, corporate governance, Credit Default Swap, crowdsourcing, death of newspapers, El Camino Real, Elon Musk, Emanuel Derman, financial independence, global supply chain, Goldman Sachs: Vampire Squid, hive mind, income inequality, interest rate swap, intermodal, Jeff Bezos, Malcom McLean invented shipping containers, Mark Zuckerberg, Maui Hawaii, means of production, Menlo Park, minimum viable product, move fast and break things, Network effects, Paul Graham, performance metric, Peter Thiel, Ponzi scheme, pre–internet, Ralph Waldo Emerson, random walk, Sand Hill Road, Scientific racism, second-price auction, self-driving car, Silicon Valley, Silicon Valley startup, Skype, Snapchat, social graph, social web, Socratic dialogue, Steve Jobs, telemarketer, urban renewal, Y Combinator, éminence grise

It’s the sell-side technology that DSPs and other buyers plug into, and it helps publishers monetize their sites and apps. Often that technology is a real-time exchange. In many ways, FBX is an SSP, except that unlike most SSPs, which try to sign as many publishers as possible, this one has only one big client: Facebook itself. * That didn’t mean FBX’s marginal contribution to FB revenue was as dramatic as the difference in bid. Like most online ad auctions, Facebook ran a “second price” auction. The economic specifics are PhD level, but essentially it meant you paid the amount of the next-highest bid, rather than what you bid. If one did the math, it meant a much better price-discovery mechanism overall. To truly increase total revenue, you needed a density of bids at the “clearing price” the ad impression had sold for, pushing the aggregate prices paid upward. No density, and all those high bids did nothing for the bottom line.


pages: 998 words: 211,235

A Beautiful Mind by Sylvia Nasar

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Al Roth, Albert Einstein, Andrew Wiles, Brownian motion, cognitive dissonance, Columbine, experimental economics, fear of failure, Henri Poincaré, invisible hand, Isaac Newton, John Conway, John Nash: game theory, John von Neumann, Kenneth Rogoff, linear programming, lone genius, market design, medical residency, Nash equilibrium, Norbert Wiener, Paul Erdős, prisoner's dilemma, RAND corporation, Ronald Coase, second-price auction, Silicon Valley, Simon Singh, spectrum auction, The Wealth of Nations by Adam Smith, Thorstein Veblen, upwardly mobile

Since bidders’ opinions are bound to be wildly divergent, it is possible that license assignment would depend more on bidders’ optimism than on their ability to create a desired service.18 Ideally, an auction design can minimize that problem. As Congress and the FCC inched closer to the notion of auctioning off spectrum rights, Australia and New Zealand both conducted spectrum auctions.19 That they proved to be costly flops and political disasters illustrated that the devil really was in the details. In New Zealand, the government ran a so-called second price auction, and newspapers were full of stories about winners who paid far below their bids. In one case, the high bid was NZ$7 million, the second bid NZ$5,000, and the winner paid the lower price. In another, an Otago University student bid NZ$1 for a television license in a small city. Nobody else bid, so he got it for one dollar. The government expected the cellular licenses to fetch NZ$240 million.


pages: 523 words: 143,139

Algorithms to Live By: The Computer Science of Human Decisions by Brian Christian, Tom Griffiths

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4chan, Ada Lovelace, Alan Turing: On Computable Numbers, with an Application to the Entscheidungsproblem, Albert Einstein, algorithmic trading, anthropic principle, asset allocation, autonomous vehicles, Berlin Wall, Bill Duvall, bitcoin, Community Supported Agriculture, complexity theory, constrained optimization, cosmological principle, cryptocurrency, Danny Hillis, delayed gratification, dematerialisation, diversification, double helix, Elon Musk, fault tolerance, Fellow of the Royal Society, Firefox, first-price auction, Flash crash, Frederick Winslow Taylor, George Akerlof, global supply chain, Google Chrome, Henri Poincaré, information retrieval, Internet Archive, Jeff Bezos, John Nash: game theory, John von Neumann, knapsack problem, Lao Tzu, linear programming, martingale, Nash equilibrium, natural language processing, NP-complete, P = NP, packet switching, prediction markets, race to the bottom, RAND corporation, RFC: Request For Comment, Robert X Cringely, sealed-bid auction, second-price auction, self-driving car, Silicon Valley, Skype, sorting algorithm, spectrum auction, Steve Jobs, stochastic process, Thomas Malthus, traveling salesman, Turing machine, urban planning, Vickrey auction, Walter Mischel, Y Combinator

In a Vickrey auction, on the other hand, honesty is the dominant strategy. This is the mechanism designer’s holy grail. You do not need to strategize or recurse. Now, it seems like the Vickrey auction would cost the seller some money compared to the first-price auction, but this isn’t necessarily true. In a first-price auction, every bidder is shading their bid down to avoid overpaying; in the second-price Vickrey auction, there’s no need to—in a sense, the auction itself is optimally shading their bid for them. In fact, a game-theoretic principle called “revenue equivalence” establishes that over time, the average expected sale price in a first-price auction will converge to precisely the same as in a Vickrey auction. Thus the Vickrey equilibrium involves the same bidder winning the item for the same price—without any strategizing by any of the bidders whatsoever.


pages: 389 words: 98,487

The Undercover Economist: Exposing Why the Rich Are Rich, the Poor Are Poor, and Why You Can Never Buy a Decent Used Car by Tim Harford

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Albert Einstein, barriers to entry, Berlin Wall, collective bargaining, congestion charging, Corn Laws, David Ricardo: comparative advantage, decarbonisation, Deng Xiaoping, Fall of the Berlin Wall, George Akerlof, invention of movable type, John Nash: game theory, John von Neumann, market design, Martin Wolf, moral hazard, new economy, price discrimination, Productivity paradox, race to the bottom, random walk, rent-seeking, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, sealed-bid auction, second-price auction, second-price sealed-bid, Shenzhen was a fishing village, special economic zone, spectrum auction, The Market for Lemons, Thomas Malthus, trade liberalization, Vickrey auction

The New Zealand government, which auctioned radio spec- trum as early as 1990 with advice from some economists who • 163 • T H E U N D E R C O V E R E C O N O M I S T seemed to have a slender grasp on reality, learned such lessons the hard way. The auctions were held without making sure that there was any interest from bidders, without minimum prices, and using a theoretical curiosity called a “Vickrey auction,” which led to considerable embarrassment. (The auction was named after its inventor, Nobel laureate William Vickrey, who made major early advances in applying game theory to auctions.) The Vickrey auction is a second-price sealed-bid auction. The “sealed bid” means that each bidder writes down a single bid and seals it in an envelope. When the envelopes are opened, the highest bidder wins. “Second-price” is the curious rule that the winner pays not his bid but that of the second-highest bidder. The elegant reasoning behind this auction is that no bidder ever has an incentive to shave his bid in an effort to make more profit; making a lower bid affects his chance of winning but not the price.