Going Once…Going Twice…

“Paul, it’s Bob Wilson. You’ve won the Nobel Prize.”

A security camera in front of Paul Milgrom’s home in Stanford, California, recorded Wilson and his wife Mary sidling up to Milgrom’s front door in the predawn darkness and repeatedly knocking and ringing the doorbell to wake him up. After a short pause to take in the momentous news, Paul Milgrom responded, “Wow, yeah. Okay.”

Story by Melissa de Witte at stanford.edu.
Robert Wilson and Paul Milgrom, photo by Andrew Brodhead.

The Nobel Prizes for 2020 were announced earlier this month. I thought I should take it on myself to understand what it was that earned these folks the Biggest Blue Ribbon for Brains in the world. I know just enough economics to get myself into trouble, so this could be fun. Economics (and science for that matter) are like languages that I speak badly (hablando de español…) I can almost read economic theory with a little wikipedia and dictionary.com at hand, but writing about it might generate some misinformation. Nevertheless, let’s dive in and alleviate your curiosity. I know you saw the awards but did you understand what they were for. I’m especially proud since northern Californians took four out of the eleven Nobel awards, two from my alma mater and two from its rival but still my peeps, woot woot!

Not All Auctions Involve Cattle or Eyebrows

My favorite award this year has to be the Prize for Economics, which usually annoys me in its advancement of “free markets,” which aren’t. This year, however, the theories were comprehensible and practical. Understanding the math is something else entirely, but never fear—we won’t go there. Two fellows from Stanford (take off that red shirt!) won for their development of Auction Theory.

When I think of auction, I always visualize a Texan with a big hat and microphone who sounds something like Leroy Van Dyke, in his famous song from the 1950s:

Either that or auctions make me think of a scene in a spy movie or comedy, where fancy people are seated in a room, and the British butler begins auctioning the mysterious painting or golden egg or Wonka ticket, which might hold a clue to the whereabouts of the Austerioserlian terrorists. Numbers are randomly repeated as he points at audience members who do nothing more than move an eyebrow or lift a pinky. Or, if it’s a comedy, the lady inappropriately dressed keeps accidentally bidding when she sneezes. To me, that’s an auction. It turns out that those are not the only types of auctions.

Auction from the First Wives Club. Photo from artnet.com.

Those auctions are known as open-bid English auctions, where the price moves from low to high. There are also Dutch auctions (aka clock auctions), where the price starts high then moves down, as well as sealed bid auctions, multi-unit auctions… but wait, there’s more! These Stanford professors won their prize for describing the theory of combinatorial clock multi-unit auctions.

Let’s translate that into English. They were interested in auctions where things were sold in groups, where the price of the whole might be more than the sum of the parts. Multi-unit or combinatorial auctions might apply, for example, to estate sales. The clock part means an auction where the price for the whole is set high, then the auctioneer lowers the price, or combinations of prices, until a bidder accepts it.

Combinatorial Clocks Are Even Better With Flowcharts

What if buyers don’t want to buy everything in the group, but bundles of things? The tricky part for the auctioneer is to look at all the bids for various combinations of the items and determine which will maximize revenue for the auctioneer. This became an important practical challenge when the FCC decided to auction off radio frequencies, which before 1994 were allocated without auction. The combinatorial clock format worked better for the telecommunication industry, while the federal government (i.e. us taxpayers) earned more overall. The format the two prize winners invented (Simultaneous Multiple Round Auction) helped provide bidders with more information about what others were bidding, which improved the bidding process for everybody. I agree; more information = better.

Once I started looking at pictures related to combinatorial clock auctions, several flow charts popped up, so of course I was instantly in love:

From a fascinating treatise on “Market Design and the Evolution of the Combinatorial Clock Auction” here

What makes the combinatorial clock auction work is the ability to create multiple rounds and the ability for bidders to select multiple bits and pieces, kind of like off a Chinese menu. Still, the very idea of radio stations today is somehow quaint. The last time I was poking around the AM dial, looking for some sports or palatable music (I’ll even take Katie Perry, come on!), all I heard was enthusiastic warbling about Jesus, singing in Spanish, or conservative talk radio. Although I didn’t really stay long enough to hear if it was conservative, they just sounded angry. I’m sure my 23-year-old would patiently ask me why I didn’t just turn on Spotify.

Photo without Covid effects in the Financial Times, taken by Andrew Brodhead.

Curses, I Paid Too Much!

Wilson, the bespectacled grinner on the right, turns out to have started an economics dynasty. Milgrom on the left was one of his students and the third “offspring” to have won a Nobel prize–the fourth person related to Wilson if you count Wilson himself. Which we probably should.

What Professor Wilson was himself especially noted for is developing an understanding about “the winner’s curse.” People often bid less than the value of an object because they fear overpaying. Nobody wants to bid $45 for an object that ends up with a resale value of $2.99. Wilson’s work also demonstrated why having more information on common objects, such as on resale values, improves bidding.

It saves a lot of time on eBay when you can see whether other people have actually sold the precious Genuine Vintage Antique doodad that your Aunt Sadie left you, which you were planning to post for sale. If the other sales don’t even cover the shipping, then you might want to see if Sadie’s grandchildren would prefer to just keep the thing. Especially if it’s this kind of combinatorial clock:

Photo from pinterest.

I think I’ll pass bidding on that one. On the other hand, if you find one in the shape of a parasaurolophus, let me know.

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