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Wednesday, September 12, 2007

The Irrational Escalation of Commitment

Does the dollar auction provide a model for the war in Iraq?:

Lessons on the surge from economics 101, by Oliver R. Goodenough, Commentary, Rutland Herald: Economics professors have a standard game they use to demonstrate how apparently rational decisions can create a disastrous result. They call it a "dollar auction." The rules are simple. The professor offers a dollar for sale to the highest bidder, with only one wrinkle: the second-highest bidder has to pay up on their losing bid as well. Several students almost always get sucked in. The first bids a penny, looking to make 99 cents. The second bids 2 cents, the third 3 cents, and so on, each feeling they have a chance at something good on the cheap. The early stages are fun, and the bidders wonder what possessed the professor to be willing to lose some money.

The problem surfaces when the bidders get up close to a dollar. After 99 cents the last vestige of profitability disappears, but the bidding continues between the two highest players. They now realize that they stand to lose no matter what, but that they can still buffer their losses by winning the dollar. They just have to outlast the other player. Following this strategy, the two hapless students usually run the bid up several dollars, turning the apparent shot at easy money into a ghastly battle of spiraling disaster.

Theoretically, there is no stable outcome once the dynamic gets going. The only clear limit is the exhaustion of one of the player's total funds. In the classroom, the auction generally ends with the grudging decision of one player to "irrationally" accept the larger loss and get out of the terrible spiral. Economists call the dollar auction pattern an irrational escalation of commitment. We might also call it the war in Iraq.

America is long past the possibility of some kind of profitable outcome in Iraq. Neo-con dreams of a quick, cheap victory, delivering democracy and peace and self-financed from Iraq's own oil revenue, got us started on this misadventure. ... And like the economics class, suddenly we were in the thing up to our necks, with only bad choices available at an ever-escalating cost.

We can cut our losses now and take our lumps, or we can keep throwing good money after bad until maybe we wear the other side out, but in the process raising our own ultimate losses substantially. And in Iraq, the losses are already desperately high, on both sides, in blood, in money, and in the erosion of institutions like law and national cohesion. ...

As our commitment to this war once again comes up for public deliberation, listen to the arguments being made for staying in the game.

"We must honor our dead." ... "The other side is giving up the fight." ... "We can't afford to lose." ... Remember the dynamic of the dollar auction, and think carefully when such plausible and emotionally appealing short-term logic is used to justify putting another whopping bid on the table.

Oh yes, there is one other way out of the spiral — in the classroom, if you allow some kind of negotiated settlement between the two sides, they can sometimes agree to split the dollar and halt the contest. ... Of course..., we are told ... that such dialogue would only serve to reward their evil actions. Victory is the only acceptable result. ...

    Posted by on Wednesday, September 12, 2007 at 12:33 AM in Economics, Iraq and Afghanistan, Politics | Permalink  TrackBack (2)  Comments (73)

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    » Dollar Auction and Iraq from Psychotria Nervosa

    One of the reasons that I love the study of Economics is that it tends to clarify and isolate the important forces that arise from the structure of complex interactions, and separate them from those that come from choices and [Read More]

    Tracked on Wednesday, September 12, 2007 at 08:52 AM

    » Economics of the Surge from Deepish Thought

    I just came across this intriguing article on using the dollar auction as a model for understanding the war in a Iraq. This is not the only applicable economic model. For example, you could gain insight into the administrations decision making... [Read More]

    Tracked on Wednesday, September 12, 2007 at 12:38 PM


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