The Dollar Auction
An auctioneer offers a dollar bill to the highest bidder, with one twist: both the highest and second-highest bidder must pay their final bid, though only the winner gets the dollar. Bidding opens at five cents. Assuming everyone wants to avoid losing money, how high could the bidding realistically go — and why would anyone keep bidding past a dollar at all?
Reveal the answer
In practice, bidding can spiral far past a dollar, sometimes to many times its value. Once the second-highest bidder is about to 'lose' their bid outright, bidding again to try to win is less bad than losing everything already committed — so both remaining bidders get trapped, each new bid individually rational even though the pair is guaranteed to lose money overall. Economist Martin Shubik devised the game in 1971 to show how rational, self-interested decisions under escalating commitment can collectively produce an absurd, self-defeating outcome — a dynamic seen in real bidding wars, arms races, and sunk-cost-driven business decisions.