Auctions trace back at least to 500 BCE, with Herodotus documenting Babylonian marriage markets – the earliest recorded use of competitive bidding as a resource-allocation mechanism. From Leonardo’s Salvator Mundi fetching $450 million to Banksy’s self-shredding masterpiece, auctions have sold everything under the sun. Properly designed, auctions reshape markets, reveal true prices, and inject speed, transparency, and competitive fairness that ripple far beyond the bidding floor.

This five-part series is an exploration to build understanding of the auction’s role, impacts, and function across industries and economies. In this first note, we set the stage – examining why auctions matter and how their often-overlooked mechanics influence markets large and small, across industries, countries, and through time.

Paper 2: John Maynard Keynes and our bidding brains: The psychology of auctions

Words by Prof. Adrian Saville and Ian Macleod

How complex could a beauty contest be? Well, great economist John Maynard Keynes (“rhymes with brains” he’d often remind people), showed just how deep such a seemingly simple phenomenon can be.

In his famous thought experiment, Keynes asked people to imagine that they were taking part in a beauty contest. He described a newspaper competition in which the faces of several models were displayed, and readers were invited to vote for the one they thought would be chosen as the winner.

The catch lies in the wording. You’re not voting on who you think is most attractive. Rather, you are voting on which model will be deemed by other readers to be most attractive.

Scratch below the psychological surface, and you’ll realise it is more complex than that still. Other readers will likely also see the trick. They will be voting not for their favourite, but for who they think others will vote for.

Now we must vote for – and this is a mouthful – who we think other people think other people think is most attractive.

We could keep adding layers of complication. But this gets us to the point. What appears at first glance to be a straightforward competition in a newspaper needs to be understood at a deep psychological level. When put into a competitive market, things happen to our brains.

The bidding brain

This carries over to the specific case of the auction. We might attend an auction with an uncomplicated plan to bid on a single item, based on predetermined criteria, with a set price range – or price target – in mind. Anyone who has bid at an auction knows it is not that easy.

Time is usually limited. Competing bids influence you emotionally. Seeing that classic car or house might spike your emotions. These aren’t necessarily bad things. As we covered in the first piece in this series, auctions bring benefits that other markets can’t and emotion is part of that. Still, the more one understands about the psychology of auctions, the better.

Auctions and anchoring

Anchoring is one of the best-understood behavioural biases. Most clearly explained by Kahneman and Tversky in the 1970s,^[1] the principle is simple and intuitive. The first figure we see in some context tends to be a number to which we “anchor” our subsequent calculations^[2]. This explains why sales are effective. Advertisers know to lead with “Was R100” and follow with “Now just R79.99”. We anchor to the higher number and the lower one looks enticing.

In the case of auctions, it is more complex. A starting bid or reserve price might be an anchor. Equally, each competing bid has its own anchoring effect. So this could change by the second.

Bidders can also create their own anchor with a pre-conceived idea. Arriving at an auction thinking “That ‘68 Shelby Mustang GT500 should go for R3.9 million” and leaving as the proud owner after a winning bid of R3.7 million would feel like a victory. Paying R4.3 million might bring mixed emotions, even if it’s an excellent price.

Summer sale

There’s a seasonal element, too. A paper in the Journal of Behavioral and Experimental Economics examined art auctions in England between 1856 and 1909^[3]. They looked for evidence that the weather impacted selling prices of art.

Their main conclusion: “the amount of daylight on the auction day has a significant positive effect on selling prices in all our model specifications.” They also found some effect on prices based on other elements, including “precipitation, temperatures, and whether daylight hours are getting longer or shorter.”

The authors acknowledge the unusual nature of the findings.“Economic theory predicts that environmental conditions, such as seasons and weather-related factors should not influence the willingness to pay for goods with values that do not vary with these conditions.” Yet half a century of auction data says otherwise. Regardless, auctioneers in South Africa should struggle with this less than their English counterparts.

Matters of the heart

In The Joy of Winning and the Frustration of Losing^[4], Astor, Adam, Jähnig and Seifert found that a losing bidder’s heart rate drops further than a winner’s heart rate does in the couple of seconds after the hammer falls. And that the winner enjoys a far bigger spike in heart rate in the few seconds after that. In other words, losing hurts. And winners – well – they have the sensational thrill of winning.

Figure 1: Heart rate in response to the auction outcome

Source: Astor et al. (2013).

More than this, the higher the stakes, the greater the emotional response. Winning feels good. Winning big feels even better.

Figure 2: Normalised average skin conductive response amplitude (SCR.amp) in response to the auction outcomeSource: Astor et al. (2013).

Interesting to action

That is all rather interesting – especially if you’re a behavioural economist or involved in auctions. How does it translate into action?

One insight might guide auctioneers. If the weather, daylight hours and mood music impact bid prices, there is large scope to nudge these environmental conditions in your favour. The right music, location, and time of year will have an impact at the margin.

Bidders can use their emotions, too. As with the Keynesian competition example, we can think a few steps ahead. While it may be a fool’s errand to attempt to avoid our behavioural biases, it helps to understand them and work with them. For example, one can anticipate that dip in heart rate that follows a losing bid. And why not enjoy the elevation on a win?

There is even scope to alter our anchor. Before checking the reserve price on that Mustang or student accommodation block, do your own calculations based on market factors and your own finances. There is no substitute for due diligence – and the deeper the due diligence the better the discipline that follows. If other bidders are looking for the most attractive model in Keynes’ competition and you’re on the third level of analysis, you improve your chances of success.

Thinking in Layers

To end where we began, another thought experiment. Imagine a room of one hundred people, each asked to think of a number between 0 and 100, and then to write down the number they believe will be half of the group’s average.

At first call, many write down 50. Half of 100 feels sensible – rational, even. But if everyone else reasons the same way, the average will cluster near 50, so the rational response should be half of what everyone else is thinking. And half of 50 is 25.

At second call, the crowd anticipates that shift. “If everyone is already thinking of 25,” they reason, “then the winning number must be half of half of 50, or 12,5.”

By the final call, it becomes clear that the exercise isn’t about numbers at all. It’s about expectations of expectations. And the winner in this process? The one who best reads not the room, but the reasoning in the room.

That, in the end, is Keynes’ enduring insight – whether in a beauty contest, an art auction, or a trading floor. What matters most is not the bid, but understanding the beliefs and psychology behind the bid.

Adrian Saville is Professor of Economics, Finance & Strategy at GIBS and founder of Boundless World, Adrian’s work focussed on business model design, innovation, capital allocation, and growth strategy to help businesses turn complex market shifts into clear strategy and measurable results.

Ian Macleod is a senior research associate at GIBS and partner at Boundless World. Ian translates rigorous economic insight into practical playbooks for real-asset and financial markets, turning messy markets into transparent, value-unlocking mechanisms.

This thought leadership article is produced as part of a series for The High Street Auction Company, South Africa’s premier auction house.  As part of a diversification and growth strategy, the enterprise has recently launched fleet and luxury divisions, with machinery to also be included in the portfolio.

^[1] Tversky, A., & Kahneman, D. (1974). Judgment under Uncertainty: Heuristics and Biases: Biases in judgments reveal some heuristics of thinking under uncertainty. science, 185(4157), 1124-1131.

^[2] Furnham, A., & Boo, H. C. (2011). A literature review of the anchoring effect. The journal of socio-economics, 40(1), 35-42.

^[3] Kliger, D., Raviv, Y., Rosett, J., Bayer, T., & Page, J. (2015). Seasonal affective disorder and seasoned art auction prices: New evidence from old masters. Journal of Behavioral and Experimental Economics, 59, 74-84.

^[4] Astor, P. J., Adam, M. T., Jähnig, C., & Seifert, S. (2013). The joy of winning and the frustration of losing: A psychophysiological analysis of emotions in first-price sealed-bid auctions. Journal of Neuroscience, Psychology, and Economics, 6(1), 14.