Lessons on the surge from economics 101
By OLIVER R. GOODENOUGH | September 12,2007
Economics professors have a standard game they use to demonstrate how apparently rational decisions can create a disastrous result. They call it a "dollar auction." The rules are simple. The professor offers a dollar for sale to the highest bidder, with only one wrinkle: the second-highest bidder has to pay up on their losing bid as well. Several students almost always get sucked in. The first bids a penny, looking to make 99 cents. The second bids 2 cents, the third 3 cents, and so on, each feeling they have a chance at something good on the cheap. The early stages are fun, and the bidders wonder what possessed the professor to be willing to lose some money.
The problem surfaces when the bidders get up close to a dollar. After 99 cents the last vestige of profitability disappears, but the bidding continues between the two highest players. They now realize that they stand to lose no matter what, but that they can still buffer their losses by winning the dollar. They just have to outlast the other player. Following this strategy, the two hapless students usually run the bid up several dollars, turning the apparent shot at easy money into a ghastly battle of spiraling disaster.
Theoretically, there is no stable outcome once the dynamic gets going. The only clear limit is the exhaustion of one of the player's total funds. In the classroom, the auction generally ends with the grudging decision of one player to "irrationally" accept the larger loss and get out of the terrible spiral. Economists call the dollar auction pattern an irrational escalation of commitment. We might also call it the war in Iraq.
America is long past the possibility of some kind of profitable outcome in Iraq. Neo-con dreams of a quick, cheap victory, delivering democracy and peace and self-financed from Iraq's own oil revenue, got us started on this misadventure. Like the students, the early bidding seemed like a fun adventure to the boys in the Bush administration. "Bring 'em on," the chief boy said about the other bidders. And like the economics class, suddenly we were in the thing up to our necks, with only bad choices available at an ever-escalating cost.
We can cut our losses now and take our lumps, or we can keep throwing good money after bad until maybe we wear the other side out, but in the process raising our own ultimate losses substantially. And in Iraq, the losses are already desperately high, on both sides, in blood, in money, and in the erosion of institutions like law and national cohesion.
In the bigger game of democratic politics, the dollar auction scenario has a particularly dangerous power. Politicians fear that voters will unfairly punish the realist who cuts off the escalation early, in the process also clearly "losing" the ever-diminishing prize. And maybe, just maybe, the appearance of a "win," even at an astounding price, will give some fig-leaf of coverage to the monumental stupidity of getting the United States of America mired in a this kind of situation to begin with.
The administration's goal is keeping the electorate pacified and the game in motion. Emphasize the cost already paid and the further cost of throwing in the towel. Promise that the other side is showing signs of exhaustion — remember Dick Cheney and the few "dead-enders?" Like the man riding the tiger, Bush and company believe they are OK so long as they don't fall off. If the regular dollar auction is irrationality in action, U.S. politics make our Iraq policy irrationality on steroids.
As our commitment to this war once again comes up for public deliberation, listen to the arguments being made for staying in the game.
"We must honor our dead." By putting more up to be killed?
"The other side is giving up the fight." Is this for real or is it another piece of what we might charitably call wishful thinking?
"We can't afford to lose." But can we afford to win even less? Remember the dynamic of the dollar auction, and think carefully when such plausible and emotionally appealing short-term logic is used to justify putting another whopping bid on the table.
Oh yes, there is one other way out of the spiral — in the classroom, if you allow some kind of negotiated settlement between the two sides, they can sometimes agree to split the dollar and halt the contest. Should we pursue this kind of thing in the Middle East? Of course not, we are told. That would involve talking to the enemy, and we all know that such dialogue would only serve to reward their evil actions. Victory is the only acceptable result. Back to the auction. Let the surge continue.
Oliver R. Goodenough is a professor of law at Vermont Law School and a faculty fellow at the Berkman Center for Internet and Society at Harvard Law School.