On irrationality of human mind to manage money

In 1971, Yale professor Martin Shubik invented a game that highlighted one of the most powerful psychological traps.

He auctioned off a dollar bill to students with simple rules: the highest bidder wins.

But there was a twist that proved just how irrational humans can be. 

Here’s how it worked: 

The highest bidder wins the dollar, but the second-highest bidder must pay their bid and receives nothing.

Everything seems rational until the bidding hits 95 cents.

Now, the second-place team faces a choice. 

They’re at 90 cents, so if they stop now, they lose 90 cents.

But if they bid $1, they only lose 5 cents (so they bid $1).

Now the other person is at 95 cents.

This is where psychology takes over.

The person at 95 cents thinks: “I can bid $1.05 and lose 5 cents instead of 95 cents.”

The other bidder at $1 thinks the same thing: “I’ll bid $1.10 and only lose 10 cents instead of a dollar.”

Back and forth they go.

Shubik regularly got students to pay over $3 for his dollar.

The record in his class was $204!

Two students spent over $200 combined so one could “win” a single dollar bill.

Three forces create this trap:

First is loss aversion: Losing $95 feels twice as painful as winning $5 feels good.

Second is commitment escalation: Each bid makes you more invested in winning. You’ve come this far, so why stop now?

Third is competitive arousal: Once someone else is bidding against you, it becomes about beating them, not the dollar.

Your brain simply stops calculating value and just wants to win.

Marketers use these exact triggers every single day.

Here’s how this get used in your ads :

Create micro-commitments before the sale with quiz funnels, email captures, free trials, and more. Each step makes backing out feel like a loss.

Show competitive dynamics like “387 people bought this today,” or “Just 99 left in stock.”

Add escalating bonuses like “Spend $50, get 10% off. Spend $100, get 20% off.”