The Frontal Cortex

Over at The Big Money, Mark Gimein has a fascinating article on Swoopo.com. Gimein calls Swoopo "the crack cocaine of auction sites" and says it's "the evil bastard child of game theory and behavioral economics." The site works like this:

Consider the MacBook Pro that Swoopo sold on Sunday for that $35.86. Swoopo lists its suggested retail price at $1,799; judging by the specs, you can actually get a similar one online from Apple (AAPL) for $1,349, but let's not quibble. Either way, it's a heck of a discount. But now look at what the bidding fee does. For each "bid" the price of the computer goes up by a penny and Swoopo collects 60 cents. To get up to $35.86, it takes, yes, an incredible 3,585 bids, for each of which Swoopo gets its fee. That means that before selling this computer, Swoopo took in $2,151 in bidding fees. Yikes.

In essence, what your 60-cent bidding fee gets you at Swoopo is a ticket to a lottery, with a chance to get a high-end item at a ridiculously low price. With each bid the auction gets extended for a few seconds to keep it going as long as someone in the world is willing to take just one more shot. This can go on for a very, very long time. The winner of the MacBook Pro auction bid more than 750 times, accumulating $469.80 in fees.

Gimein emphasizes the "sunk cost" illusion as motivating repeated bidding on Swoopo. Because we've already bid a hundred times on the laptop, we assume we're more likely to win on the 101st bid. But that's false; those earlier bids are utterly irrelevant. And then there's the jackpot effect: people tend to fixate on the big prize (the cheap laptop, the lottery payout, etc.) and not pay attention to the incremental cost of participation. Each bid, after all, is only sixty cents, but we could save hundreds of dollars on that Apple laptop! Unfortunately, the brain is terrible at addition, and so we quickly lose track of how much money we've actually spent trying to acquire the prize. (It also helps that Swoopo requires people to prepay for "bids" in packs, which makes it even easier for us to not think about bids in terms of real money. If Swoopo bidders had to use physical coins for every bid, I imagine the site would be far less appealing.)

But I still don't think that explains Swoopo's addictive appeal. Instead, I think the real appeal of the website is the sheer uncertainty. As an item nears the end of bidding, a big countdown clock appears. At any moment, someone else can come up in and bid on the item, which then resets the clock to twenty seconds. The process repeats and repeats, until the price gets to a point that discourages other bidders. (It's probably less discouraging to you, since you've already sunk $50 in bidding fees.) But here's the dirty secret of the site: after placing a bid, you're forced to wait and watch. You have no way of knowing if your bid will win, or if someone else will swoop in and bid on the laptop at the last possible second. In other words, it's just like a slot machine: you put in a quarter and wait for the wheels to whirr. With swoopo, the random number generator is other people.

Why is this excruciating state so appealing? The answer, I think, has a lot to do with how our brains process rewards. The popular myth of dopamine is that the neurotransmitter equals pleasure, that it's the hedonist chemical responsible for sex, drugs and rock n' roll. The dopaminergic reality, not surprisingly, is actually much more complicated. Consider the landmark work of Wolfram Schultz. His experiments followed a simple protocol: He played a loud tone, waited for a few seconds, and then squirted a few drops of apple juice into the mouth of a monkey. While the experiment was unfolding, Schultz was probing the dopamine-rich areas of the monkey brain with a needle that monitored the electrical activity inside individual cells. At first the dopamine neurons didn't fire until the juice was delivered; they were responding to the actual reward. However, once the animal learned that the tone preceded the arrival of juice -- this requires only a few trials -- the same neurons began firing at the sound of the tone instead of the sweet reward. And then eventually, if the tone kept on predicting the juice, the cells went silent. They stopped firing altogether. Schultz calls these cells "prediction neurons," since they are more concerned with predicting rewards than actually receiving them.

What's interesting about this system is that it's all about expectation. Our dopamine neurons constantly generate patterns based upon experience: if this, then that. They realize that the tone predicts the juice, or that betting on the laptop might get us a discounted reward. This means that our dopamine circuitry isn't just titillated when we win the auction - those predictive cells are excited every time we bid, as they wait to see whether or not the reward will arrive. Luke Clark, a neuroscientist at Cambridge, has done a very clever experiment that captures this process at work. Vaughan Bell, over at MindHacks, summarizes the results of the experiment:

The research team looked at the activity differences in the dopamine-rich mesolimbic system in a gambling task - comparing wins, misses and near-misses. Near-misses were where the reels on a slot machine just missed the payout.

It turns out that near-misses activate almost exactly the same dopamine circuits as actual wins - but here's the punchline - they were subjectively experienced as the most unpleasant outcome, even worse than total misses.

In other words, the dopamine system was firing like a rocket display but the experience was awful.

Interestingly, although near-misses were experienced as aversive they increased the desire to play the game but only when the person had some perception of control, by choosing what the 'lucky' picture would be. Of course, like choosing 'heads or tails', it's only an illusion of control because the outcome is random anyway.

This, in a nutshell, is how Swoopo works. It's one near-miss after another, as we bid and then bid again. The experience feels awful - we know we're wasting money - and yet we can't look away.