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*Russian Federation*

January 30, 2010

Did you know this story?)

Every year Professor Max Bazerman sells to his MBA students at Harvard Business School $20 note more expensive then its face-value.

During the past ten years he has earned more than $17,000 by auctioning $20 bills to his MBA students. In the course of almost two hundred of his actions, the top two bids never totaled less than $39, and in one instance totaled $407. How does he do it?

First of all he demonstrates the $20 note to whole class and says that he will give it to the student who will give him back the highest sum. But there is one condition. The student whose sum will follow the winner’s sum must give his sum to the professor too. For instance, let’s suppose that two leading bids are $15 and $16. So, the winner will obtain $20 in exchange for his $16 and the second student will give his $15 to the Professor.

Auction starts with $1 bid and very fast reaches $12-$16. At this point most students stop bidding and there’re left only two students with highest bids. Slowly they reach $20 bid. Obviously from this point to win in sum is impossible but to lose own money and get nothing back none wants.

As soon as the auction gets passed the $21 bid, class rolls with laughter. So smartMBA students are ready to give more money then the face-value is. Indeed, that’s rather comic. However the auction goes on and reaches $50 bid; then – $100; sometimes – $200 or more.

At first all students consider that they have opportunity to get easy money. Well, they are not fools and will not pay more then face-value of the $20 note. However when auction reaches $12-$16 line, the second-place student realizes that he faces the prospect of money loss. That’s why he starts bidding more then intended until auction reaches $21. At this very point both main competitors will lose money, but one of them will lose only $1, the other – $20. To minimize loss they both make efforts to win. But this rush leads to that with every new bid both of them lose more money. Thus they reach the line when further bidding makes no sense and the opportunity to get easy money results in losses.

More entries: The Olympic games! (7), The tale about MBA students ("How to sell a $20 note for $200"), Elephant's tenderness (2), About Christmas movie! (4), Questions without answers (2), Christmas memories, The point in that ... (3), on 16 December