Sunday, February 17, 2019

Bidding advice from an unlikely source

In a first-price auction where the low bid wins, bidders face a tradeoff: a lower bid increases the probability of winning, but reduces profit if they win. In Rising Strong (p. 187), Brene Brown, a professor of social work, identifies five psychological traps that distort how bidders view the tradeoff, which can lead to suboptimal bidding.
  1. Emotional blinders:  when bidders become "so emotionally invested in working with a client" that they bid too aggressively (too low). 

  2. The loss leader:  an aggressive (low) bid on this project "will lead to future work that ... will eventually offset the loss."

  3.  Uncharted territory: If bidding on a project in a new area, you don't know what you don't know, and will likely win only if you under-estimate costs and bid too low. 

  4. Win at any cost:  when a bidder becomes addicted to the thrill of winning rather than maximizing profit, the bidder will bid too aggressively (too low). 

  5. Defensive pricing:  a bidder may bid too low in order to protect a relationship with an existing client by making it difficult for others to win.

The main point of Brown's book is to present her "rising strong" algorithm on how to grow from conflict.    The bidding advice was lagniappe (Louisiana slang), at least to me.  

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