In 1971, Yale professor Martin Shubik designed a simple classroom experiment that revealed something profound about human psychology and how easily logic can collapse under emotional pressure.
It was called the Dollar Auction Game.
The premise was straightforward: the highest bidder would win a dollar bill. The twist? The second-highest bidder also had to pay their bid but would receive nothing in return.
At first, the game seemed like harmless fun. Students bid 10 cents, 25 cents, 50 cents. But once the bidding reached 95 cents, something remarkable and irrational happened. The second-place bidder, sitting at 90 cents, realized they were about to lose nearly a full dollar if they stopped. So, they bid $1. The first bidder, not wanting to lose their 95 cents, bid $1.05. The other countered with $1.10. Back and forth they went, bidding over $2, even $3 for a one-dollar bill. The record in Shubik’s class? Over $204 paid for a single $1 bill.
Why We Fall for the Trap
Shubik’s experiment exposed three powerful psychological forces that govern our decision-making:
1. Loss Aversion: We fear losing what we already have far more than we value potential gain. Losing 95 cents feels much worse than the joy of winning a dollar.
2. Commitment Escalation: The deeper we get into something, emotionally, financially, or otherwise, the harder it is to walk away, even when it no longer makes sense.
3. Competitive Arousal: Once a rival enters the equation, the goal often shifts from “making a good decision” to “winning.”
Together, these forces can lead even the smartest people to make irrational choices.
How This Applies to Everyday Life and Estate Planning
The Dollar Auction is more than a psychology experiment; it’s a mirror held up to how people make emotional decisions about money, control, and legacy. When it comes to estate planning, families often find themselves in similar psychological traps.
• Loss aversion shows up when parents delay planning because they don’t want to face the idea of mortality. The pain of thinking about “loss” outweighs the rational benefit of preparation.
• Commitment escalation appears when family members cling to old plans or outdated financial structures because they’ve “already spent time and money” setting them up, even when they no longer make sense.
• Competitive arousal surfaces after a death, when siblings or heirs become fixated on “winning” an inheritance dispute instead of preserving family relationships.
Like the students bidding for that dollar, families often end up paying far more, emotionally, financially, and relationally, than they would have if they’d simply stepped back and planned strategically.
Breaking the Cycle
So how do you avoid falling into this trap? Whether it’s bidding on a dollar, making investment decisions, or planning your estate, the answer lies in clarity, perspective, and professional guidance.
1. Pause before you react. Big financial or family decisions shouldn’t be made under emotional pressure.
2. Establish boundaries early. Just as bidders should set a maximum price before the auction starts, families should establish clear legal and financial parameters through proper planning.
3. Use objective oversight. A neutral professional, whether an attorney, trustee, or financial advisor, helps remove emotion from the equation.
Estate planning, at its core, is about preventing emotional decisions from leading to costly mistakes.
A Rational Legacy
Professor Shubik’s dollar auction was designed as a lesson in irrationality, but its takeaway is timeless. Without clear boundaries and thoughtful planning, even the most rational people can find themselves in unwinnable situations.
At Stouffer Legal, we help families approach their financial and estate decisions with strategy, not emotion. Whether you’re planning for your future or protecting what’s already built, having a rational plan in place ensures your legacy doesn’t become an emotional bidding war.
________________________________________
References
Photo by Nathan Dumlao on Unsplash
Shubik, M. (1971). The Dollar Auction Game: A Paradox in Noncooperative Behavior. Yale University.
Finn, M. (2024). How marketers use psychology to build commitment and value.
Kahneman, D., & Tversky, A. (1979). Prospect Theory: An Analysis of Decision under Risk. Econometrica.
