Sunk Costs, Scarcity & Smart Franchise Buying: Lessons from the $20 Auction
Inspired by the behavioral economics experiment created by Harvard Business School professor Max H. Bazerman.
Imagine this: You're in a classroom. An instructor holds up a crisp $20 bill and offers it to the highest bidder. Bidding starts at $1. But there’s a twist—both the highest and the second-highest bidders must pay their bids. Only the highest bidder gets the cash.
At first, it seems easy. Someone bids $1. Another goes to $2. But soon, something strange happens. People don’t stop. Someone bids $20. Then $21. Then $22. The second-highest bidder doesn’t want to lose the $19 they’ve already bid… so they keep going, just to minimize their loss. Eventually, someone might pay $30 to win a $20 bill, just to avoid losing more.
This isn’t just a classroom experiment. It’s a perfect metaphor for how many people buy a franchise.
The Escalation of Commitment Trap
Buying a franchise is a major life decision. It involves time, money, emotion, and often, identity. Most prospective franchisees:
- Spend hours researching different industries
- Interview with multiple franchisors
- Attend discovery days
- Hire a franchise attorney
- Tell friends and family they’re starting a new venture
Each of these steps—valuable on its own—builds emotional momentum. You feel like you’re moving forward. You're investing energy. You don’t want that effort to be “wasted.”
Even if red flags emerge (maybe the financials look shaky, or the culture feels off), you’re tempted to continue. “I’ve already come this far,” you think. “I might as well finish it.”
This is the same logic as the losing bidder in the $20 auction. Psychologists call this escalation of commitment—a cognitive bias where we continue investing in something because of what we’ve already put in, even when future gains are uncertain.
Social Proof and Scarcity: The Hidden Bidders
Franchise systems often market with urgency and exclusivity:
- “Only two territories left in your area.”
- “Another candidate is looking at the same region.”
- “This brand is blowing up—we’re closing new deals every day.”
You’re told that if you don’t act now, someone else will. It sounds like information—but it’s really just noise.
This is the second factor in the $20 auction: other people’s actions influence yours, even when you don’t understand their motives. Why did that guy bid $17? What does he know that I don’t? Better match him… or go one higher.
In franchising, the same thing happens. You see others buying in, or sense you’re “falling behind.” You don’t know if they’ve done their due diligence, or if they’re just as emotionally invested as you are. But their momentum influences yours.
How Do You Avoid the Franchise Auction Trap?
The lesson from the $20 auction isn’t “don’t play.” It’s don’t play emotionally. Here's how smart franchise buyers apply this wisdom:
1. Define Success—Before You Shop
Before looking at a single franchise, outline your:
- Financial goals
- Operational preferences
- Lifestyle goals
- Comfort zones
2. Track Your Thinking
Use a franchise comparison worksheet or advisor-led dashboard to keep track of:
- What you like about each brand
- What concerns you
- How it stacks up against your criteria
3. Watch for Escalation Red Flags
Some signs you're slipping into auction-mode:
- Continuing due to sunk costs
- Ignoring your gut
- Rushing to beat a deadline
Ask yourself: “If this were the first day I saw this brand, would I still move forward?”
4. Embrace Strategic “No’s”
Saying “no” after exploration isn’t a loss—it’s clarity.
5. Get an Advisor Who Isn’t Bidding, Too
Work with someone who will help you stay objective—not just push a deal.
The Franchise Isn’t the Prize—Your Future Is
Franchise decisions are too important to be made like bids in a classroom experiment. You’re not trying to win a brand—you’re choosing your future.
Don’t bid. Build.
About the Author
Mike Martuza is a Senior Franchise Consultant and Partner with Franchise Consulting Company and author of The Franchise Rules: The No-Nonsense Guide to Finding a Franchise That Fits." With decades of experience in entrepreneurship, coaching, and strategic business development, Mike helps aspiring business owners find the right franchise that aligns with their goals, values, and lifestyle. Contact Mike at
mikemartuza@thefranchiseconsultingcompany.com.











