Imagine an auction with these rules:
There are 20 people in a room, who can’t communicate.
They are bidding on £10 provided by the auctioneer.
They each have to put a sealed bid in.
Each one has to pay the amount they bid to the auctioneer whether they win or not.
The winner gets the £10.
The real puzzle is, what’s your strategy as a bidder? And just to complicate things, consider this: bidding £11 may not be a dumb thing to do. It turns out that the auctioneer often makes a lot of money first time round.
This puzzle comes from the Econtalk podcasts, which I’ve been listening to a lot today, so please listen to that for more discussion. I’m trying to avoid borrowing from others’ content on this blog, but this was so interesting I couldn’t resist - Russ Roberts, the host, seems to focus particularly on practical microeconomics, so if that’s something that interests you, run, don’t walk to your MP3 player.