Martin Shubik's Genius Trap, or How to Sell $100 for $200

Recently, I published an article about the sunk cost trap, where I looked at real-life examples of how it works against us. However, I forgot to include one of the most interesting experiments called the "Dollar Auction," which shows how this trap can be used to sell 100 dollars for 200.

So, imagine you are sitting in a lecture hall. An economics professor walks onto the stage, pulls a crisp $100 bill from his wallet, and says: — I want to sell this $100 bill to you via auction. The starting bid is $1.

It seems like free money. Someone shouts: "I bid a dollar!" Another: "Five!" The audience laughs; everyone wants to buy the hundred for next to nothing. But the professor raises his hand and adds just one additional rule: — The bill goes to the highest bidder. However, the person who places the second-highest bid must give me their money and gets nothing in return.

From this moment, the fun auction turns into a psychological thriller. This game, invented in 1971 by economist Martin Shubik, brilliantly shows how 100% logical steps lead smart people to total madness.

The Anatomy of Madness: How the Trap Snaps Shut

Let's trace what happens in the audience next. Two gambling participants remain in the game: Player A and Player B.

Stage 1: Greed ($1 to $50) At this stage, bids rise easily. Player A bids $10, Player B bids $20. The motivation is simple: everyone wants a freebie. Buying $100 for $20 is a great deal!

Stage 2: The Point of No Return ($50 to $99) Player A bids $90. Player B realizes his previous bid was $89. If he stops now, the professor takes his $89 (under the second-bid rule), and he is left with a huge loss. The only way to save his money is to outbid. He bids $99. Now he is in the green: he will pay 99 but get 100 ($1 profit).

Stage 3: Catastrophe (Crossing the $100 mark) Player A is now in second place with a bid of $90. If he stays silent, he loses 90 bucks. And here his brain makes an absolutely logical but destructive decision. He shouts: "101 dollars!" Why pay $101 for a $100 bill? Because losing $1 dollar ($101 minus $100) is much better than losing $90 dollars!

Stage 4: Endless War Now Player B risks losing $99. To minimize losses, he bids $102. Then A bids $105. The auction continues until someone runs out of money. In real experiments by Shubik and his followers, students, top executives, and mathematicians regularly bought a $1 bill for $3, $5, and even $10! The record for one such "joke" auction at a corporate party was $204 for a $100 bill.

There is always only one winner — the cunning auctioneer.

Why Does Our Brain Break So Easily?

Shubik's paradox perfectly illustrates how two powerful psychological mechanisms work:

1. Loss Aversion. The pain of losing $50 is twice as strong for our psyche as the joy of gaining $50. When auction participants cross the halfway point, they stop playing for profit. They start playing to avoid loss.
2. Escalation of Commitment. It is unbearable for a person to admit that their previous investments were in vain. "I've already put in so much effort, I can't just give up!" screams our ego.

Shubik's Auction in Real Life

You might think: "Well, I would never buy 100 bucks for 105!" But the truth is, we play this game constantly. Here are a few simple examples from life:

• Legal battles. Neighbors sue over a fence worth 50,000 rubles. In the process, they hire lawyers, pay for expert opinions, and spend 150,000 rubles each. Stopping is impossible: if you withdraw the lawsuit, you lose the money spent on lawyers and get nothing. You have to keep paying "out of principle."
• Waiting for the bus. You arrive at the stop. No bus for 20 minutes. You could call a taxi, but you think: "I’ve already waited 20 minutes, it’s about to arrive, I don’t want to waste money on a taxi." You wait another 20 minutes, freeze, and eventually call a taxi anyway, having lost both time and money.

How to Win at This Game?

Mathematics and Game Theory provide two cruel but strictly correct answers on how to win Shubik's auction:

Strategy 1: Don't Start. The only guaranteed way not to lose in a game with sunk costs is not to enter it at all. If you see the rules are rigged against you (a toxic partner, a dubious pyramid scheme, an obviously losing argument), don't even make a "trial" bid of $1.

Strategy 2: The Preemptive Strike. If you are forced to play, you need to destroy your competitors' motivation right at the start. Your first move should be this: as soon as the professor declares bidding open, you immediately shout: "99 dollars!" It becomes mathematically unprofitable for any other participant to outbid you (betting $100 to win $100 is pointless). Competition dies before being born, you take $1 of profit and save your nerves.

The Main Lesson of Shubik's Paradox: What seems logical and rational at every single step can lead to total catastrophe in the finale. Sometimes the best decision is to accept a small defeat right now rather than enter a battle to save your ego and lose everything.