Two travelers are transporting identical antiques. Unfortunately, the airline smashes both of them. The airline manager proposes that each traveler write down the cost of his antique, any value from $2 to $100. If both write the same number, the airline will pay this amount to both travelers. If they write different numbers, the airline will assume that the lower number is the accurate price; the low bidder will receive this amount plus $2, and the high bidder will receive this amount minus $2. If they can’t confer, what strategy should the travelers take in deciding how to bid?
At first Traveler A might like to bid $100, the maximum allowed. If his opponent does the same then they’ll both net $100. But A can do better than this: If B bids $100 and A bids $99 then A will come away with $101.
Unfortunately if B is rational then he’ll have the same insight and also bid $99. So A had better undercut him again and bid $98.
This chain leads all the way down to $2. If both travelers are perfectly rational then they’ll both bid (and make) $2, the minimum price.
But this seems very unlikely to happen in actual practice — in real life both travelers would likely make high bids and get high (though perhaps unequal) payoffs.
“All intuition seems to militate against all formal reasoning in the traveler’s dilemma,” wrote economist Kaushik Basu in propounding the problem in 1994. “There is something very rational about rejecting (2, 2) and expecting your opponent to do the same. … The aim is to explain why, despite rationality being common knowledge, players would reject (2, 2), as intuitively seems to be the case.”