Auctions are particularly interesting from both an economic standpoint and a psychological one.

Case in point, on a recent episode of BBC’s Homes Under the Hammer, two guys – Steven and Simon bought a property at auction. The property was in relatively good condition but needed some work done.

The catalogue guide price for the property was £285k. Steven and Simon (S&S) had done their research, viewed the property and read the legal pack.

At the auction, the auctioneer opened the bidding at £280k – no hands. He tried £270k still no interest. At £260k, Steven put his hand up. The auctioneer asked for £265k and someone else bid. Steven bid again at £270k. The other bidder shook his head. The auctioneer gave fair warning and dropped the hammer. Steven and Simon had their property for £270k.

When the show went to interview S&S, it became apparent that their underlying feelings were not that they had bagged a bargain, but that they had missed something that everyone else had seen.

I wasn’t privy to and have no knowledge of what actually went on with Steven and Simon prior to the auction, but I imagine the conversation went something along these lines.

They knew from the catalogue that the guide price was £285k (anchor). They would have known that this was only an estimate. They had done some research on prices in the area and had a feel for what they could sell the finished property for. They estimated building costs to get the property to a fit state to sell. They probably had a chat and decided that their max spend, given the above, was around the £300k mark and they probably planned their bidding strategy accordingly.

At the auction, the hammer dropped on £270k, based on my guess of their max, a full 10% lower than they were willing to pay. An absolute bargain! One would expect them to be ecstatic. But they weren’t – classic winner’s curse. Their psychological response was totally the opposite of ecstasy, it was regret, remorse and fear that they had missed something. Why was no one else bidding? Why did only one other potential buyer not value the property above £265k?

It is these reactions and responses that I find fascinating – the ‘predictably irrational’ thoughts. This is precisely what draws me to the field of decision sciences.

For those that are interested, S&S spent a further £40k renovating the property and the show ended with two estate agents valuing the property between £375k and £400k – a profit of £65k – £90k. The interesting thing was that when Steven and Simon heard the valuations, they both expressed the same feeling – relief!