Vsauce! Kevin here. I’ll sell you this 100 dollar bill for 1
dollar. Seriously, that’s a pretty amazing deal
for you, right? It’s a free 99 bucks! So? Whaddya say? Do we have a deal? Great! Here ya go... What was that? Huh? Oh, it sounds like your friend Billy will
give me 5 bucks for my 100 dollar bill. And that’s a better deal for me. So... Billy, you've got yourself a... Hey! Hey! Hey! Aren't you gonna outbid him? If you bid 10 bucks for my 100 dollar bill
you can still win a 90 dollar profit. So… aren’t you gonna do that? Of course you are! Why wouldn’t you? It’s the rational thing to do. But there is a catch. Before we get to that….the concept of buying
money with money made me wonder how much money it costs to buy money? According to the 2018 Federal Reserve currency
budget, it costs 5.6 cents to print a dollar bill but 13.2 cents for a hundred note. It costs 136% more because it has fancier
anti-counterfeiting technologies like this blue 3D ribbon thing. You can buy 240 authentic Monopoly money bills,
the most printed currency in the world, for $6.78 or about 2.8 cents per note. And a $10,000 stack of the prop hundreds used
in movies runs $25 bucks. Or 0.25 cents per fake one hundred dollar
bill. But I will sell this real hundred dollar bill
at auction to the highest bidder. Between you and your friend. The catch is that not only do I get the winning
bid obviously, because the winner is buying my bill, but the second-highest bidder also
has to pay me their losing bid. So you definitely don’t want to lose or
else you’re just throwing away your money for nothing. So where did we leave off? You bid 10 bucks and your friend Billy bid
5. If he drops out now, that means you win! You pay 10 bucks for my 100 dollar bill, netting
yourself a 90 dollar profit and your friend pays me his losing bid of 5 bucks. But he’s not gonna drop out of the game
because he can just outbid you with $20 bucks. And if you drop out that’s the easiest $80
bucks that Billy has ever made. Hopefully. So you outbid him at $30 bucks. He goes to $40. You go to $50 and I’m about to be very,
very happy. By the way, if anyone has already figured
out the mess that’s about to unfold here -- I’ll explain how you figured that out
in just a bit. Alright, Billy bids $60 for my $100 dollar
bill and I’ve officially just made a profit. As long as the winning bid and the losing
bid combine to be more than $100 bucks - I win. So if the winning bid is $60 dollars and the
losing bid is $50 - I get paid $110 bucks for my $100 bill. A cool $10 dollar profit for me and a gain
of $40 for the winner. Here’s the thing. Even at $99.99, whoever wins is still coming
out ahead. Even if you’re just getting a free penny. And the higher the bidding goes, the more
money the losing bidder will lose. So you both keep bidding $70. $80. $90. When you first started this game, $100 for
a buck sounded awesome. But $100 for $90… not as awesome. Still totally worth it, though. So we keep going. Billy doesn’t want to lose his $80 bucks
for no reason so he bids $100 and we’ve officially reached dollar equilibrium. Billy just agreed to pay $100 dollars for
$100 dollars. The profit incentive to keep bidding is now
gone. But minimizing the loss compels you to bid
$110 dollars because that way you’re only overpaying $10 dollars for my $100 dollar
bill and you’re not losing your $90 bid. But Billy doesn’t want to lose $100 dollars
so he bids $120. At this point you’re locked in an endlessly
increasing contest to see who can pay more money for my one hundred dollar bill. All the while telling yourself that you’re
doing the right thing, because based on your previous bid, you are. In a 1976 volume of the journal, “Organizational
Behavior and Human Performance,” Barry M. Staw called this the ‘escalation of commitment.’ You’re already in, you know the rules and
you might as well keep going, because you don’t want to lose. So the bidding grows. $130. $150. $1,000 dollars for my $100 bill. Once we passed the $100 dollar bidding threshold,
I’m the only one who can win this game. Because you two can’t -- ever. Before bidding hit $100 bucks one of you could
have won the auction and made a profit, that’s why you kept bidding. That’s why you got into this game in the
first place. But as long as everyone playing makes a rational
decision based on their prior action, the bidding reaches a point where it’s impossible
to come out ahead of where you started. It becomes impossible for you to actually
win. When Yale economist Martin Shubik published
“The Dollar Auction game: A paradox in noncooperative behavior and escalation,” he wanted to demonstrate
the paradox of something with a defined value like a dollar bill selling for more than that
amount due to perfectly rational behavior. He conducted his game at cocktail parties
with large groups of people when quote, “spirits are high and the propensity to calculate does
not settle in until two or more bids have been made.” He was using $1 bills, and he said that it
wasn’t uncommon for bidding to reach $3 to $5. 3 to 5 times the amount of his buck. Once Shubik’s auction begins, it’s almost
guaranteed to ruin everyone but the auctioneer. And that was his point: some games you can’t
win because escalation based on rational decision-making drives you to an irrational result. For those who figured out what was going on
before the bidding war began -- you used backward induction. A method of reasoning in which you start at
the end of a scenario and determine which choices along the way are optimal. By the time you worked your way back to the
beginning, you could tell that even if you rationally did the right thing -- you kept
outbidding Billy based on the commitment to your previous bid -- this was going to end
badly. For both of you. In game theory, it’s a no-win situation
-- no matter what choices you make, you’ll never gain from them. Shubik’s lesson here is clear: beware of
escalation, and sometimes the only way to win a game is to not play it. And as always - thanks for watching. Uhh..oooh I'm getting a little squirrel-y
now about what I've done and what I haven't done. So this was zero. Um, so I just missed out on one. Now. At one. Oh no. Um. Can we just cut? I need to think.
There is another way, besides not playing, to win this game. Take your pal Billy aside for a moment, and tell him you'll split the winnings evenly.
what was the point of that?
I like that guy but I watch it on 150 % speed.