The New York Times published an interesting article last week, Paying the Price for the Thrill of the Hunt, on dollar auctions and game theory. The article discussed game theory concepts including the “escalation of commitment” in auction-type scenarios. The game used to demonstrate the theory is one in which people bid on a $20 dollar bill with the highest bidder taking the bill and the second highest having to pay his or her final bid as well. In this scenario bids often go over the value of the bill as each party bids higher to keep from losing. We often see the same psychological dynamic in house bidding. Artificially low priced houses can draw many bidders. Making an offer on a house, particularly in our area, involves quite a bit of time and also an emotional investment. Sucked in initially by the low price, committed buyers began bidding to win rather than bidding for value. As a result of this frenzy, an under-priced house can often sell for more than if it was priced conventionally. This raises two questions. Is underpricing a smart strategy and how do you deal with underpricing as a buyer? As to the first question, underpricing can be an effective strategy in a market with sufficient demand. In essence, a determination must first be made that this is a “Sellers” market and that there are enough unsatisfied buyers to engage a sufficient number to create the commitment environment. If only one bidder shows up at an auction, you are in trouble. And in residential real estate, failing to sell a house at a certain price is a stigma that is hard to erase. From a buyers standpoint, the Times article advices that the only way to deal with such a scenario is “not to play.” We have found however, that value can be had in these multiple bid situations. Sometimes the initial ask is too low and bidders feel compelled to stay within a certain percentage or number to that initial price. In this instance, a winning bidder may actually win. Knowing value before you engage and staying within that range is the trick to playing the game.