With a group of friends, classmates or co-workers, offer to auction a $20 bill. One more rule: both of the top two bidders must pay their final bid.
Imagine that person A and person B are foolish enough to join your auction, with person A bidding $0.25 and person B overbidding to the tune of $0.30. Obviously this should escalate—who wouldn’t bid $7 to earn $20, especially if this could keep you from losing money you previously bid?
As bidding passes $10, you—the auctioneer— earn money. However, the auction is far from over. As the two bidders reach $20, it becomes obvious they will not earn money on this transaction—but how much are they willing to lose? For example, if person A has bid $19 and person B bids $20, wouldn’t person A be smart to bid $21 in order to win the auction and thus lose only $1 as opposed to paying $19 for a second-place bid? According to game theory (and with players of infinite resources), without collusion, there is no logical end to this bidding war, and you will soon be a billionaire, minus $20.
However, if your bidders recognize their peril at the auction’s outset and are not prevented from colluding, they can quickly agree to let one or the other win the auction at a low price and split your $20.
Cool, huh?
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