he most valuable painting ever sold at auction was Leonardo da Vinci’s Salvator Mundi. Sold for $450m in 2017.
Source: Leonardo da Vinci - Getty Images https://commons.wikimedia.org/w/index.php?curid=64103353
And it was sold, broadly, in an auction process which is in your mind’s eye already. You know, something like this:
Source: Sotheby’s
A rapid-fire auctioneer gabbling and gavelling away, as people make curious gestures (a bit like in the painting) to signal their bid.
But.
There are auctions happening constantly which make $450m look like pocket change.
In particular, internet search. Google searches generate about $260 BILLION per year in advertising revenue*.
The sponsored slot at the top of the screen? That’s the most valuable.
Source: Google
Now, Google don’t use a gavel. They use something called Generalised Second Price auctions (GSP) to try to make sure that no-one pays too much or too little:
All sellers say their maximum bid to appear in the top slot.
The seller with the highest bid wins (obvs).
But they pay the next highest bid.
So, in the search above, for slot #1 Sports Direct would pay whatever Adidas had bid. And Adidas would pay whatever Hoka had bid. And so on.
The psychology of it is this:
Imagine Sports Direct were prepared to bid £200 for slot #1.
Imagine Adidas were prepared to bid £100 for slot #1.
Sports Direct’s ideal would be to pay £100.01 – juuuuuust enough to beat Adidas, and saving itself £99.99 it doesn’t need to pay.
So, Sports Direct pays £100 (Google is prepared to miss out on the extra 1p to keep advertisers coming back)
And Adidas’ pain at coming second is eased by knowing that it will pay HOKA’s third-place price for a second-place slot.
Everyone’s annoyance at losing the auction is cancelled out by getting the next-best spot at a discount! And all of this is happening in the background every time someone searches for anything.
Lots of papers have been written on whether this is the best theoretical system** … but as Google has been using it since 2004, I reckon it’s more than smart enough!
I’ll leave you with our favourite auction story.
In 2015, a Chinese billionaire bought a Modigliani painting for $170 million. And he bought it on a credit card, so that his family could bank the reward points and “continue flying for free”! I guess that’s how you stay a billionaire…
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Yours sincerely,
Graham Ponting CFP Chartered MCSI
Managing Partner
