Should We Shun An Auction?

An enduring myth that people persist with is that corporations take hard-nosed, rational, unemotional decisions. 

In general, this is nonsense.  A corporation does not take a decision; the people in the corporation do and they are subject to the twists and turns of emotional upheaval.  In case you wonder if I can back this up with an example, here is one (of many, I chose this, because it is just so egregious): in 2010, telecom companies in India paid around Rs 1 lakh crore (that is, Rs 1,000,000,000,000!) for 3G spectrum and never recovered from the experience, plunging into whipping debt.  They justified their bids with extraordinary projections of business which none of the senior guys ever believed were possible. 
Why did they commit hara kiri? 

The answer has to do with emotions.  It is a story that teaches us a great deal.  It is the story of how auctions work in the human mind.  

Elizabeth Phelps of New York University and Mauricio Delgado of Rutgers Univ (of whose team Dr Phelps was a part) have studied the issue of overbidding in auctions and here is what they have found: since auctions are, in a way, competitions for something that is limited, there are two emotions that present themselves – the need to be better than someone and the fear of losing out (or ‘fomo’, as now termed).   
Which is more dominant?

But first: have you come across dopamine? 
Dopamine is a type of neurotransmitter. Your body makes it, and your nervous system uses it to send messages between nerve cells. That's why it's sometimes called a chemical messenger. Dopamine plays a role in how we feel pleasure (after receiving a reward, for instance). It's a big part of our unique human ability to think and plan.
From Webmd 

So, here is what the studies show:

Winning an auction is intrinsically socially competitive, unlike winning a lottery.  Both wins activate dopaminergic signalling (as has been found in the study).  But, now comes the catch: losing a lottery has no effect, while losing a bidding war inhibits dopamine release.  Not winning a lottery is bad luck; not winning an auction is social subordination.  Auctions, by making people feel as if they stood to lose something, tend to manipulate them into overbidding further than they normally would.
And, finally, it would be nice for us to accept that the brain is wired to take emotional decisions. A summary of these studies in National Geographic (https://www.nationalgeographic.com/science/article/why-do-people-overbid-in-auctions) says this:   

In these auctions, for example, one and only one part of the brain – the striatum – reacted very differently. When players won, brain activity in their striatum increased. Losing, on the other hand, evoked different reactions depending on the game – the striatum didn’t react when a player lost the lottery game, but activity in this area fell when they were defeated in the auction. In fact, the volunteers with the greatest penchant for overbidding showed the deepest falls in striatal activity when they lost. 

This is not the first time that the activity of the striatum has been linked to winning and losing during psychological games, and other studies have revealed that the area plays a role in decision-making and feelings of reward.