Tim Harford writes:
You might think that if there’s one thing an economist should be able to tell you how to do, it’s successfully list an item on the auction Web site eBay. Auction theorists are, after all, celebrated in the profession; one of them, Susan Athey, won the John Bates Clark medal in April. (Clark medalists, who include Paul Samuelson, Joe Stiglitz, and Steve Levitt, are scarcer than Nobel laureates.)
Yet, although the theory of auctions is well-developed, its predictions are sensitive to wrinkles in reality. For example, the standard economic assumption that people are rational is usually a good one: When the price of beer rises, most people drink less beer. But auctions require “if he thinks that she thinks that I think that he thinks” chains of reasoning that tend to have weak links. Those links can easily break if any bidder has any reason to suspect that any other bidder is irrational.