 How much do you think there's a lot of Napoleon's hair on the coast? What is the price of this beautiful meteorite stone? How much will you pay for this incredible tuna? No idea? Well, sometimes it's difficult to find a rice with such specific goods, but there is a way to find out an auction. One of the oldest forms of commerce, which according to the stories, took place already 500 years BC. And probably the most bizarre story for the auction has happened when the entire Roman Empire has been sold to a single person who has been killed two years later. Well, the word auction comes from a Latin word, auctions, which means increasing. And the characteristic of an auction is that the price is determined during the process, so many times with the gaining, because surprisingly auction theory is a part of the subject of gaining theory. You have several players, book readers, and in the end there is a winner, a classical game and an analyze. The game theory studies how to define rules and tries to predict the behavior of the players. And this is what fascinates me, especially on auctions, how rules can have an influence on your behavior. And I will show you how rules of different auctions have another impact in your behavior and force you even to reveal something that you actually wanted to hide. And if you still don't know the auction theory's serious topic, well, several Nobel prizes in economics have been awarded for auction theories for example this, the rich gentleman here of course, William Vickery. Remember William Vickery as we'll talk later on in it again. Before we start, let me introduce the main concept of an auction. It's quite simple. So first, I need to define the term of a true value. This is a kind of limited price for every individual for a specific object. For example, let's say this handkerchief, I love so much, my true value of this handkerchief is 10 euro. I will pay very much for it. And if you say for example, well, I don't like the color, so your true value will be only 2 euro. So every individual has another true value on a particular object. And on the other hand, we have good price that you pay in an auction. So actually the amount of money that you want to spend, and obviously the price that you pay should be lower than your true value, so that in the end you can gain a certain plus. Well, nowadays those kinds of different auction formats exist. I will introduce a major four, the English, the Dutch, the first price and the second price auction. And let's start with the most famous one. We know this, the English auction they use in this auction houses like Christmas where they sell paintings. This is an ascending auction, which starts with a very low price and is raised incrementally until no higher is received. So you try to overpick each other, and in the end there comes the moment we all wait for the hammer when the object is sold. So how to behave in this auction? Well, according to the theory in the perfect world you should behave like this guy. You just don't care about the prices and the behavior of the other players. You just wait until you reach your true value, your living price and then just quit. By the way, how much is the fish? $3.1 million. This must be the greatest fish ever seen on the planet. This is an example where the theory and reality contribute because although it's quite heavy, it's a good face on the hammer. The price was too high as he professed later in the interview. It was five times higher than his true value. And this is what is called a winner's curse when you do a behavioral effect. When you get involved in this gambling you see that you can't control yourself and in the end pay even more than you wanted. So, it was made in this auction. When I know how it looks like in Texas, let's have a look. Well, good luck. If you're interested in what it looks like just to get into the mood. Well, let's move to another type of auction. Let's imagine you want to sell hundreds of those fishes, hundreds of flowers, and you can't wait until the bidding process is over but still want to achieve a high price. Then you need a Dutch auction. It was invented in Holland in the 17th century with seven tools. It is a decent auction which starts with a very high price, goes down, goes down, and the first one to raise his hand is the winner of the auction. The auction ends immediately when he placed his fifth. So, how to behave here? Well, here you should behave like this here. Yeah, you should be very fast. Exactly. You should be fastest actually if you want to win. And this is at the same time the big advantage of this auction is speed. You can use this for selling perishable goods like flowers or food. So, they are covered in English and Dutch. And now let's go to the third one. Imagine you don't want to signalize the other winners. Then you need a first price auction because this is a sealed auction where all participants submit their goods simultaneously, secretly, for example, in an envelope and the auction here chooses the highest big envelope with the highest bid and this is the winner. He has to pay his price and he gets the item. So, what is the behavior here? Well, here you should behave like this guys. Then in fact, a first price auction gives you a strong incentive to like about your true value. Since you don't know the price of the others, they can be very low. You don't want to risk of telling the true value to overpace. So, therefore, you are always underestimating. So, remember the first price auction you never reveal your true value. That was the theory and now let's come to the practice. I'm going to play a real auction with you right now for real money. And then now I want to sell you something you can't buy so easily anywhere this for a week and cash now. Look how beautiful it is. Look how smooth it is, right? And you can do everything with it. You can place it with your cash. You can put it in your pocket. You can put it in your hand even. And it starts, no hands. Once you hear the magical blow the handkerchief disappears. But that's the rule. It's still floating around the molecules here. One is here, one is here, and one is even here. And now you hear the magical blow and the handkerchief appears. Once again, in your hand. Isn't that great? The real money on the secret handkerchief you can buy it right now in an auction. Take out your smart phones take out your smart phones and go to the Google form you have logged in before the talk. So we will play the first price auction, a secret auction. You start making a bit secretly and in front of the game we'll choose the winner and we'll announce it after the show. We will play for any money. Please. This is great. You come up with the money and tell me the secret how it works. So please put in real estate prices that you're going to pay. And I want you first to fill in this appeal. So this is the price that you are going to pay for this secret handkerchief. Please put in here to remember that the price that you pay should be low or it should lie in your true value. Put in all the numbers and put a dot for decimal numbers. And now I want to ask you to fill also this appeal as well. This value will not participate in an auction. This is just for me for information because I was curious and made for a little surprise at the end of the talk. Filling in here the true value so what is the limit price for this handkerchief? Filling in the numbers with a dot for decimal numbers. So please send your answers now and hide your phones. We don't need them anymore. And in the end I will announce the winner. And now we move on to the last auction. The greatest auction of all and the reason why Michelle decided to give this talk. The second prize auction. Also known as the victory auction after this guy who has been awarded a Nobel Prize for it. So at first glance it is quite similar to the previous one. Everyone's a bit similar in an envelope for example. The auctioneer chooses the highest bit and this is the winner. But here comes the difference. The winner doesn't pay his prize he pays only the second highest prize. Why that? Because this small change in rules provokes a special behavioural effect. It makes bidders reveal their true values. A second prize mechanism encourages everyone to bid truthfully. This is an auction where a prize you want to pay equals a true value. And I will prove right now in a single example why it makes no sense in this auction to lie there is Barney and Helena and they are interested in this here. So these are the true values of them. So if they play a second prize auction Barney will be the winner as he pays the highest bit of 100 and he will pay only 70 because this is the second highest bid of anyone. Now let's see if it makes any sense for Barney to change his bid. Doesn't make sense to overestimate. What if he puts 150 instead of 100? Well, as you see, nothing changes. He is still the winner with the highest bid and he still pays 70. But what becomes this situation endless true value would be 120. Well, in this case Barney is still the winner but now he has to pay 120 instead of 100. So actually you want to avoid this situation when you overpay your true value. And the other situation doesn't make sense for him to underestimate. Well, in this case nothing changes. Still he is still the winner with the highest bid and still pays 70. But what if Agnes, as we move behind here, Barney loses the object although he would like to pay even 100 for it. So underestimate is not a good strategy neither. The only good strategy, dominant strategy is to bid truthful. That's why it's called an honest auction. In a second price auction you never can influence the price that you pay. You are not influenced on the second price. This is the price of another person. You only have influence on the probability of winning or losing the auction. And so it makes no sense of misrepresenting your value because in the end you will pay less anyway. I wonder if it's such a quick mechanism why don't we use this everywhere? Here eBay uses the so called proxy bidding and this is the mixture of the English auction and the second price auction. You will realize you never pay the price on eBay that you have bid. You always pay something below and this is exactly the second price. You will also have some eBay fee. Do we have the results? So I will now announce the winner. I'm very curious to know what's on the price. So did you put real prices on it guys? Because the winner of the auction is Oleg. Who is Oleg? Oleg. Here. May I tell the price of your money? I messed it up. Sorry? I messed it up. Okay, you messed it up? I messed it up. Then I will so this next one is Jesus. Jesus, right here. It is a price that's really okay. You are 99, right? You are my client who built this field. Now you guess why, since we have heard of a second price auction. If you would play a second price auction hypothetically, you would put in this price, this travel, and now let's have a look if there will be any change in the results. In fact, Jesus stays the winner, but now you will pay on the second price that will be only 15. So you see how a changing rules can influence the outcome of an auction and can provoke you to tell the truth. And that's why I want to finish my talk with my mother's advice in every life and always say the truth except you're playing the first price auction. Thank you.