Constructing Value

November 23, 2011
Posted by Jay Livingston
Cross posted at Sociological Images

I don’t know the sociological research on auctions – surely it must exist – but auctions seem like a wonderful illustration of how value is socially constructed. I didn’t really need to be convinced that people don’t always live up to economists’ ideals of rationality, but I was reminded of it on Saturday when I watched the auction of items from my mother’s “estate” (i.e., stuff in her apartment). I wasn’t in the actual auction room; nowadays you can watch – and bid – online.

As someone who is relatively ignorant about art, I of course was puzzled as to why one piece was worth several hundred dollars while another might fetch only a $50 or no bids at all. But I thought that potential buyers would have an idea of how much something is worth – the objects and information about them are all available beforehand – and they would bid and stop bidding according to these prior valuations. But look at this lithograph, which graced my parents’ wall for as long as I can remember.

The opening asking price was $20.* None of the people at the auction house or online would offer that much. For the potential bidders, the picture was not worth $20. 

The auctioneer then lowered the opening bid to $10. Someone offered the ten bucks. A bargain. But then someone else bid $20. The picture which had not been worth $20 suddenly was. And then it was worth $30. You can see the bidding history to the right of the lithograph. The bidders were reluctant – twice someone came in just as the gavel was about to come down – but in the end, the picture that nobody thought was worth $20 eventually sold for twice that much. In the interval of a few minutes, this minimal interaction between bidders had quadrupled the value of the picture.

There’s also a cognitive-dissonance explanation. If I bid $10 for the item, I’m not just telling myself, “I think this picture is worth $10.” Instead, the message I’m sending to myself is more general: “I want this picture.” Once we decide to buy something, our subjective valuation of it goes up – we’re more comfortable thinking that we got a good deal than thinking that we wasted our money. Most transactions end there; we buy something at a price, and we are happy with it. But an auction encourages us to turn that subjective valuation into higher and higher cash bids.

* It can be a bit daunting, depressing even, to think that a picture so familiar that it feels like a part of your life turns out to be worth so little to other people.


PCM said...

Except a smart bidder would know that the house will lower the price if there is no bid. So even if you're willing to pay $40, it makes no sense to bid $20 if you can get it for $10. You might be the only bidder.

Jay Livingston said...

Maybe so, but on most items, someone came in at the original starting price. And in some cases (including one of my mother's items), there really was no bid, not even at half price. So it was my impression with this litho that nobody wanted it, then someone figured "Ten bucks, what the hell," -- a sort of impulse purchase. And note that the person who wanted it -- wanted it enough to bid $40 was not the original $10 bidder.