Understanding the psychology behind auctions
- 08 Mar 2018
- Best Practice & Strategies
Auctions are an attractive proposition for participants. The chance of receiving a bargain at the end of proceedings is too difficult for some people to exit.
Whether it is eBay, a regular auction or some sort of eAuction, the nature of auctions themselves place participants under unique psychological conditions, and as such, bidders might spend more than they intended in the first place.
In this blog post, we’ll examine some of the psychology behind auctions, the history of auctions themselves and the types of auctions that are facilitated by the internet.
Auctions, their history and purpose
The word auction is derived (like most languages in Europe) from Latin. It comes from the Latin phrase augeō, which means ‘I increase’ or ‘I augment’.
Auctions have a long history, with some recorded as early as 500 B.C. - wherein Babylon - women were auctioned off for marriage in a ceremonial event every single year.
They became far more widespread around Europe, for auctioning off cattle, land or property, until the 18th century where their use declined but experienced a resurgence in the 19th and 20th century; with the latter facilitated by the internet.
Often, people enter auctions to get a good deal on something they want to purchase. Whether it is a product, service, property or land - bidders seek a bargain.
However, research from the National Bureau of Economic Research, based in the US, indicates that approximately half of eBay auctions result in items going for higher prices.
The question is why is that the case?
Psychological elements in auctions
Numerous psychological elements are at play when you participate in an auction. Think about your own experiences – have you ever been so invested in obtaining something from an auction that you’ve acted impulsively and spent more money than you intended?
It is little wonder that ultra-rich bidders send trusted confidants to bid on their behalf. These intermediaries can make decisions on whether to pursue bidding on an item without emotional bias.
We’ve produced a list of the most common psychological factors at play in auctions:
- Auction fever – present in both online and offline auctions, it’s an emotional state bidders experience that causes them to deviate from their predetermined bidding strategy. For instance, you might be bidding on a car and set yourself a budget of £20,000 before the auction. And when bidding exceeds £20,000 because you’re already committed, you exceed the amount you originally set out to pay.
- Social facilitation – regards the tendency of individuals to behave differently when they are being watched or competing with others undertaking the same task. In sport, runners tend to post quicker times when competing directly against other people instead of against the clock. Scientists believe it is caused by competitive instincts between athletes. It’s similar in auctions, bidders have an insatiable need to beat their rival bidders.
- Endowment effect – where sellers over-value things they possess instead of items they could buy, despite other items having a clear advantage over the item possessed. For example, an investor may choose to stick with assets they know and they’re comfortable with – even if they become unprofitable or inappropriate to their objectives – instead of choosing a newer, improved offering.
Exploiting these psychological triggers is key to success or controlling your urge to participate in auctions. They are all examples of emotional bias, something where your behaviour and decisions are directly influenced by emotions.
Powers of persuasion
Persuasion plays a key part in bidder behaviour in auctions. Robert Cialdini, a Professor of Social Psychology at Arizona State University, authored Influence: The Psychology of Persuasion, a book designed to help readers become better ‘persuaders’. Cialdini postulates that you can influence your peers by considering six key tenets:
- Reciprocity, Scarcity, Authority
- Consistency, Liking, Consensus
Of the six mentioned, auctions predominantly deal with scarcity and consensus.
During auctions, scarcity is embedded into the process. Generally speaking, humans overvalue things they think will run out. Auction items are scarce because they’re unique and scarce in time.
For instance, you only have one opportunity to win the item in question, once you’re outbid and the auction ends, you can no longer obtain the item.
Social proofing, or consensus, is a powerful persuasion tactic auctions take advantage of. We take the lead from our peers, so lots of people say something or do something, we’ll be more likely to replicate that action. Auctions place you in competition with other people who all consider the item valuable, and therefore, reinforce buying behavior.
Online auctions have changed the game
The internet has fundamentally changed the way we deliver auctions. It can be argued that it all started with eBay in 1995, when Pierre Omidyar wrote and published the Auction Web, which eventually became the eBay we know and love today.
eBay popularised the notion of online auctions (also known as eAuctions), which over 20 years later, has led to radical changes in the way we conduct our online bidding and selling.
In particular, technology has enabled us to change the rules of auctions, with fascinating consequences.
We’ve compiled a list of the main eAuction types below:
- English auction – the classic type of auction where a seller sets the price, a time limit and bidders are encouraged to bid on the item. The highest bidder wins. This type of auction remains popular because of the familiarity and intuitive nature of the process.
- Dutch auction – is the reverse of classic auctions. The price begins high and is lowered until a buyer accepts the price.
- Japanese auction – an initial price is displayed. It either starts from zero or whatever the sellers' reserve price is. Buyers are then invited into a bidding area, where the displayed price steadily continues to climb. Bidders can leave the process at any stage if they feel bids are too high. The auction ends when a single buyer is remaining.
eAuctions have revolutionised the sourcing process in procurement. Now, when selecting suppliers, organisations can pit contractors against one another in an auction environment, to encourage competition and therefore; receive the best price.
Online auctions are here to stay
Despite eBay arriving over 20 years ago, online auctions show no sign of abating, even with digital transformation rapidly changing our society.
When considering eProcurement, auctions facilitate the best deal for businesses seeking to improve deals with their suppliers – so why would that change? What do you think? Send us a message on our LinkedIn or Twitter accounts to let us know.
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