Frequently Asked Questions
What's the best strategy for bidding?
The EqualShares method uses a second-price (or Vickrey) auction, in which the highest bidder wins but pays the second highest bid price. Economic theory suggests that the optimal bidding strategy in a second-price auction is to bid exactly the amount that you value an item.
For example, suppose that Rick and Jill are getting a divorce and splitting their property. Since Rick values their Ford SUV at $14,000, he should bid exactly that amount. Here's why: Suppose that he bids more than $14,000 for the car--say, $16,000. If Jill bids $15,000, then Rick will regret his bid, since he would be paying $15,000 for a car that he values at only $14,000. If Rick bids less than $14,000--say, $10,000--and Jill bids $13,000, then Rick will again regret his bid, since Jill will have gotten a car for $10,000 that he values at $14,000. (For a brief theoretical discussion of second-price auctions, click here.)
How do you figure out how much something is worth to you?
Suppose you're bidding on a sofa. Start by guessing how much it's worth to you--say, $800. Now test that amount: Would you rather have $800 or the sofa? If you'd rather have the sofa, try a higher value and test again. If you'd rather have the cash, try a lower value. Keep testing numbers until you're indifferent between the cash value and the item itself.
Should I ever bid more that the market value?
Sure. Bid what the item is worth to you. An old baseball mitt might only go for $2 on eBay, but have deep sentimental value to you and your fellow bidders. If it's worth $100 to you, bid that amount.
What if I don't want an item. Should I bid zero?
Even if you don't want an item for yourself, it may still have value to you if you can sell it to someone else. Suppose that Jill is asked to bid on a car, but she already has one and doesn't want another. She believes that she can sell the car for $12,500, but that selling it would involve some trouble and expense. She decides that the car is worth only $12,000 to her, since she'd be indifferent between receiving $12,000 in cash and the car.
So she should bid $12,000. If Rick bids $14,000, then he'll win the car and be charged $12,000 (the second highest bid). This is a just outcome, since Rick will be charged roughly the market value of the car. If the woman were to bid, say, $1,000, then Rick would only be charged that amount. That would be an unjust outcome, for he'd be getting a car with a market value of more than $12,000 for only $1,000.
I plan to sell most of the stuff I win on eBay. What should I bid? I don't feel comfortable giving myself a profit at my family's expense.
By bidding exactly what each item is worth to you, you help ensure that each item is fairly valued and given to the person who values it the most. Suppose that you're asked to bid on a set of speakers that you think you could sell on eBay for $300. Should you bid that much? A good test is to ask yourself if you'd rather have $300 or the speakers. I bet you'd rather have the $300, since selling the speakers would involve hassle and expense, and there's no guarantee that you'd get the full $300 for them. However, if you're indifferent between getting $270 in cash or getting the speakers, then you should bid that amount, for that's exactly what the speakers are worth to you.
My mother has a houseful of furniture and I don't have the time to appraise it or sell it. What should I bid?
One solution is for the person in charge to invite outsiders (like estate liquidators or car dealers) to bid on individual items. Their bids will help ensure that whoever wins an item is charged a fair amount, so that you needn't bother bidding on (and later selling) items that you don't want for your own use. If whoever's in charge doesn't invite outsiders to bid, you can bring in your own and then use their bids as your own.
I'd like to give most of my share of my mother's estate to my brother, who sacrificed a lot to take care of her over the past few years. Should I just bid low amounts for the different items?
If you and your brother are the only heirs, then you might not want to use the EqualShares method at all. Instead, you should talk with your brother and work out a way for him to receive a larger share of the estate. If there are other heirs and you use the EqualShares method, then bid exactly how much you value the item. After all of the shares are allocated, then you can give as much of your share to your brother as you see fit.
About the EqualShares method:
Why do you make the winner pay the second highest bid price?
It's hard to figure out how much to bid in a first-price auction, in which you pay exactly what you bid if you win. In order to avoid what economists call the "winner's curse," the optimal strategy is to bid less than what you think an item is worth. Naive bidders often make bidding mistakes in these types of auctions. But the optimal strategy in a second-price auction, in which you pay the second highest amount bid if you win, is to bid exactly what you think each item is worth. By the way, a second-price auction is similar to an eBay auction (a type of English auction), in which the winning bidder is charged just a bit more than the second highest bid.
My wife and I are getting a divorce. How can we be sure that each of our shares will be absolutely equal?
They probably won't be absolutely equal. Our goal instead is to achieve what theorists call an "envy-free" outcome, in which neither of you would prefer the other's share over your own. Suppose that you and your wife have three things to divide and that each of you submit the following sealed bids for them:
Your wife wins the
car for $5,000 and the desk for $4,000, while you win the leather furniture for $3,000. To balance things, your wife must pay you $3,000 in cash. She ends up with a car that she values at $6,000, a desk that she values at $5,000, and $3,000 less in her bank account, so she believes that she’s walking away with $6,000 + $5,000 - $3,000 = $8,000. This is well more than half of the $14,000 value that she places on your combined property. She's going to be envy-free. What about you? You walk away with leather furniture that you value at $6,000, plus $3,000 in cash, so you think that you're getting a total of $9,000 worth of property. Since this is also more than half of the $15,000 value you place on everything, you're also going to be envy-free.
Why don't we just sell everything and split the money 50-50 instead?
The problem is that people often value their own property more than the market does, so selling their stuff would leave them with less value than they had before. Suppose, for example, that your things have these market values:
If you sold them all, you and your wife would have to split $9,000, and you'd be much worse off than if you'd followed the EqualShares method. If the market value of an item is ever higher than your personal valuations, then the EqualShares method allows you to sell it to an outsider.
My soon-to-be ex-husband is a conniving lout who will definitely take advantage of any opportunity to cheat me out of my rightful share of our property. How can I protect myself from him?
You can make the EqualShares method resistant to treachery by doing the following: (1) Don't allow any of the items to be heirlooms. (See Step 6 of the Advanced Method) (2) If one of you cares deeply about an item and the other does not, give the person who cares an entitlement (See Step 7 of the Advanced Method) to the item at its appraised value. (3) Get at least one outside bid on all valuable items. The more bids you can get on each item, the better. (4) Have a neutral and trusted outsider keep records.
If your husband is so angry that he's willing to hurt himself in order to hurt you, then the EqualShares method might not work well for you. He might, for example, bid high on items that you care about in order to keep them from you or make you pay more for them.
How is the EqualShares method better than the age-old method of having the beneficiaries take turns picking which things they want?
Having recipients take turns won't work well if the property varies greatly in value. Suppose that three items are being distributed: a $10,000 car, a $2,000 dining room set, and a $100 sewing machine. You wouldn't be happy if you were the last one to pick. The taking-turns method also doesn't permit unequal shares or outside bidders (like estate liquidators).
Why can't we use fake money or poker chips instead of real money?
With the EqualShares method, no money actually changes hands until the bidding is over. Until then, what's bid and owed is recorded in "share accounts." But when the auction is over, you have to use real money to balance the accounts. If Joe gets a $10,000 car and his sister Sue gets a $100 sewing machine, she won't think it's fair if he compensates her with fake money.
Who developed the EqualShares method?
It was developed by an economist, Lori Alden, Ph.D. The method is based on the theoretical work of several mathematicians and economists, most notably William Vickrey, who won the Nobel Prize in Economics in 1996.
I don't want my kids to get an heirloom and then turn around and sell it to a stranger. How can I prevent that?
Step 6 of the Advanced Method tells you how to make sure that certain heirlooms will not be sold to people outside of the family.
One of my kids doesn't have a lot of money. I'm afraid that he'll be unwilling to bid, for fear of having to pay money out of his own pocket.
There are three ways to help poorer recipients bid more freely: (1) Distribute cash to the recipients along with personal effects, so that those who win a disproportionate share of the property won't need to dip as much into their personal savings to compensate the others. One way to generate cash is to sell some of the items that you're giving away before the auction begins. Step 8 of the Advanced Method explains how to do this. (2) Divide the property you're distributing into several small lots that are auctioned sequentially, so that the recipients are less likely to get in over their heads. (3) Agree to lend poorer recipients money for a short time after the auction, in case they need to sell some of the items they've won in order to compensate the others.
My daughter is a lot richer than my son. Won't she bid a lot more and get all of the stuff?
It's possible that your daughter will bid more for certain items. For example, she might value an expensive painting more than your son, who might not feel that he can afford to own the painting himself. But if the son believes that he can sell the painting, he'll bid an amount close to the market value and your daughter (if she wins) will be charged a fair price. Alternatively, if you allow outsiders to bid on the painting, a reasonable reserve price may be established. Both your daughter and son should be happy with this outcome. Your daughter ends up with the painting, which she wants, and your son ends up with more money, which he wants.
I plan to will my house to my son and daughter. Should my executor sell it after I'm gone and distribute the cash proceeds to them?
It depends. Perhaps one of your kids hopes to move into the house after you're gone, or wants to fix it up so that it can sell for a higher price. In that case, it may be best to auction the house to the highest bidder. On the other hand, if neither kid seems interested in owning the house or fixing it up, it's probably best to sell it and distribute the cash proceeds.
Copyright © 2004 Lori Alden. All rights reserved.