Sunk Costs, Scarcity & Smart Franchise Buying: Lessons from the $20 Auction.

Harvard Business School professor Max Bazerman runs an experiment in his negotiation classes. He holds up a $20 bill and auctions it off — but with one unusual rule: both the highest bidder and the second-highest bidder have to pay their final bids. Only the winner gets the $20.

The bidding almost always starts rationally. Someone offers a dollar. Someone else offers two. By the time the bids reach $12 or $15, something shifts. The second-place bidder — now facing the prospect of paying $14 and getting nothing — raises to $16 to try to win. The first-place bidder, now in second place, raises again. The auction regularly ends with someone paying $30, $40, even more for a $20 bill.

Smart people. Bad outcome. And the mechanism that produces it shows up constantly in franchise buying.

How the auction maps to franchise decisions

The $20 auction works because of a single psychological trap: once you've invested something — time, money, emotional energy — the desire to avoid losing that investment starts to distort your judgment about future decisions. Economists call it escalation of commitment. Most people call it being too far in to quit.

In franchise buying, the trap builds gradually. You spend a weekend researching a brand. You request information and spend an hour on an intro call. You review the FDD. You talk to franchisees. You fly to Discovery Day. At each step, your investment grows — and at each step, the psychological pressure to continue grows with it.

"I've already come this far. I might as well finish it."

That sentence, or some version of it, is one of the most dangerous things a franchise buyer can think. Because by the time you're saying it, you're no longer evaluating the opportunity on its merits. You're evaluating it against the sunk cost of everything you've already put in — and sunk costs are irrelevant to whether the decision in front of you is a good one.

The question is never "how much have I already invested in this?" The question is always "if I were seeing this opportunity fresh today, would I pursue it?" If the answer is no, the right move is to stop — regardless of what you've already spent.

The scarcity overlay

Escalation of commitment becomes significantly more dangerous when combined with artificial urgency — and franchise sales processes are often very good at creating it.

"Only two territories left in your market." "Another candidate is looking at your region." "We need a decision by the end of the month to hold this territory for you."

These messages exploit the same mechanism the $20 auction does. They trigger the fear of losing something you've been working toward — something you've already invested in — and compress your decision-making timeline exactly when you need more time, not less.

Social proof works the same way. When a franchisor mentions that "other candidates are moving forward," the implication is that other people see something you might be missing — that the opportunity is real and you should act before someone else does. But following others' actions without understanding their motivations isn't due diligence. It's a shortcut that bypasses exactly the thinking you need to do.

Genuine scarcity is real in franchising — territories do get taken, and good systems do have limited availability in certain markets. The question is whether the urgency you're feeling is a reflection of actual market reality or a sales technique. Those are different things, and they deserve different responses.

Five ways to buy smart

1. Define your success criteria before you start looking. Before you research a single brand, write down what you need this business to do for you. Income requirements. Time commitment. Operating style. Capital limits. If you have those criteria clearly defined upfront, you have something to evaluate opportunities against that exists independent of how deep you are in a particular process. It's much harder to rationalize a bad fit when you have your own written criteria in front of you.
2. Track your thinking with a comparison worksheet. Document what you learn about each franchise candidate — the numbers, the franchisee feedback, the operational demands, the territory economics. When you're deep in the process on a single brand, it's easy to lose perspective. A written record of how this brand compares to others, against the criteria you set at the start, keeps you anchored to the decision you originally intended to make.
3. Watch for escalation red flags. Periodically ask yourself: if I were seeing this opportunity for the first time today — knowing everything I know now — would I pursue it? If the honest answer is "probably not, but I've come too far to stop," that's the sunk cost trap talking. Recognizing it is the first step to not acting on it.
4. Embrace strategic rejection as clarity, not loss. Walking away from a franchise you've spent months evaluating doesn't mean the time was wasted. It means the process worked — you gathered enough information to make a good decision, and the good decision was no. That's the outcome the process is supposed to produce when the fit isn't right. Reframe the walk-away as the system functioning correctly.
5. Work with advisors who have no stake in closing a deal. A franchise attorney, an independent financial advisor, and a consultant who is genuinely focused on fit rather than placement all serve the same function: they help you see what you're looking at without the distortion that comes from being inside the process. The best outside perspectives aren't cheerleaders — they're people who will tell you what they actually think.

Don't bid. Build.

The $20 auction produces bad outcomes because the participants stop thinking about whether winning is actually valuable and start thinking only about not losing. The goal shifts from "should I have this?" to "I can't let someone else take it."

Smart franchise buying requires holding onto the original question throughout the process: is this the right business for my situation, my capital, my operating style, and the life I'm trying to build? Not "have I come too far to quit?" Not "what if someone else takes this territory?" Not "the franchisor says there's another candidate looking at my market."

The right franchise decision isn't won in an auction. It's built through a clear-eyed process that stays anchored to what you actually need — from the first conversation to the last signature.

Mike Martuza

Franchise consultant with 20+ years of experience and author of The Franchise Rules . He works with executives, career changers, and investors to find the right franchise — or decide that franchising isn't the right path at all.