When purchasing a house, your real estate agent may show you a house and will tell you the list price. Typically, you will give a counter-offer which will be less than list price. You will hope that the  owner will either accept or negotiate some amount in between your amount and the list price. In this case you may be assuming that the owner understands prisoner’s dilemma and will act in the best interest of both parties (you and him) and that you will respond accordingly. But in our assumption we tend to forget that there is another player in the game who needs to maximize his returns as well – the realtor. There may be instances where he will drag you into a bidding game without you being aware of the situation. And then, you may get carried away.

One common strategy that realtors employ is that of finding another prospective buyer and them pitching you against them. Psychologically you will be expected to get desperate to win and get the house because you have by now developed an affiliation for it (To understand this concept better, do read my highly recommended Influence: Science and Practice). It is very important that you truly estimate what your ZOPA (Zone Of Possible Agreement) is and what your final limit is.

A good article that talks about such realtor strategies and how to defend yourself against being dragged into bidding, read this article by a real estate agent herself, Alison Rogers.