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<center>{{efficient}}</center> | <center>{{efficient}}</center> | ||
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After allowing three rounds of the experiment to take its course, we determined that the simulated market was nearing the True Value, which would have in turn ended the game and our experiment. It was at this point that we injected information into the market in the form of a Federal Reserve announcement. The bid ask spreads that were being used by each individual team were still a bit low. As a result the Fed announced, “Students at Dickinson College are in much worse shape than they believe”. This statement although simple caused the market to jump tremendously. The Bid/ Ask spreads jumped by nearly 200 dollars directly after the announcement is was made. The market was at this point much higher than the true value, but it was the immediate panic reaction by the market that caused this to happen. By simply using the word much, the market assumed that their original calculations were way off as they relied heavily on the Fed announcement contents rather than focusing on their original assessments. This is similar to how markets have been reacting with regards to recent Fed announcement regarding interest rate hikes. | After allowing three rounds of the experiment to take its course, we determined that the simulated market was nearing the True Value, which would have in turn ended the game and our experiment. It was at this point that we injected information into the market in the form of a Federal Reserve announcement. The bid ask spreads that were being used by each individual team were still a bit low. As a result the Fed announced, “Students at Dickinson College are in much worse shape than they believe”. This statement although simple caused the market to jump tremendously. The Bid/ Ask spreads jumped by nearly 200 dollars directly after the announcement is was made. The market was at this point much higher than the true value, but it was the immediate panic reaction by the market that caused this to happen. By simply using the word much, the market assumed that their original calculations were way off as they relied heavily on the Fed announcement contents rather than focusing on their original assessments. This is similar to how markets have been reacting with regards to recent Fed announcement regarding interest rate hikes. | ||
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The experiment itself was largely based off the fact that the players in the room had partial information, which was the total weight of their group. The total weigh of their group was just a partial segment of the total value of the asset (true value), which was the total weight of the room. Therefore as the conductors of the experiment we were able to alter the overall consensus of the actual True Value of the room was. Following the Fed announcement the market began to bracket itself around a number it believed to be the true value. However, now because of the higher value, we released an announcement from the Department of Health, “Recent Studies have shown that the average student at Dickinson, was a little lighter than originally thought.” This announcement caused the Bid/ ask spreads to come back down toward the actual true value of the room.<br> | The experiment itself was largely based off the fact that the players in the room had partial information, which was the total weight of their group. The total weigh of their group was just a partial segment of the total value of the asset (true value), which was the total weight of the room. Therefore as the conductors of the experiment we were able to alter the overall consensus of the actual True Value of the room was. Following the Fed announcement the market began to bracket itself around a number it believed to be the true value. However, now because of the higher value, we released an announcement from the Department of Health, “Recent Studies have shown that the average student at Dickinson, was a little lighter than originally thought.” This announcement caused the Bid/ ask spreads to come back down toward the actual true value of the room.<br> | ||
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The game being played by those market makers is a zero sum game in that a gain by any team in a trade results in a loss from the other. This gain or loss cannot be determined until the end of the game, when the current market (average) price is given. Then every buy you made under this price would be a gain for your market-maker, as would every sell over this number. You would loose money if the opposite of this were true. As such, since our example of the game ended before the true value of the asset had become the market price, the gains and losses by each team, while zero sum, can be thought of as a more short term phase, if the game would have gone to completion, these gains/losses would be much different for each team. <br> | The game being played by those market makers is a zero sum game in that a gain by any team in a trade results in a loss from the other. This gain or loss cannot be determined until the end of the game, when the current market (average) price is given. Then every buy you made under this price would be a gain for your market-maker, as would every sell over this number. You would loose money if the opposite of this were true. As such, since our example of the game ended before the true value of the asset had become the market price, the gains and losses by each team, while zero sum, can be thought of as a more short term phase, if the game would have gone to completion, these gains/losses would be much different for each team. <br> | ||
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*Group 4: <br> | *Group 4: <br> | ||
The most successful group in the game, but most likely due to the fact that the game ended early. Initially thinking they were slightly on the heavy side, they dropped there weight down and then multiplied it by 4. They had a similar strategy as group 2, just not as aggressive, thinking prices were low, they inflated their bid ask prices slightly so they could sell at a higher rate if possible, or at least be able to view a lot of buy offers. The group made most of its money in the early rounds however, when it took advantage of some really low buy offers. | The most successful group in the game, but most likely due to the fact that the game ended early. Initially thinking they were slightly on the heavy side, they dropped there weight down and then multiplied it by 4. They had a similar strategy as group 2, just not as aggressive, thinking prices were low, they inflated their bid ask prices slightly so they could sell at a higher rate if possible, or at least be able to view a lot of buy offers. The group made most of its money in the early rounds however, when it took advantage of some really low buy offers. They kicked ass. | ||
<center>{{efficient}}</center> | <center>{{efficient}}</center> | ||
Latest revision as of 17:56, 9 May 2006
Reaction to Information
The first round of the experiment was difficult; it was unclear to many participants how the market established in the game was supposed to work. The challenging part about such an experiment is that many participants did not have any previous knowledge of a market atmosphere. The concept of market maker was a little difficult for them to grasp. Interestingly enough no teams completed a trade in the first round. This however would have been the most effective time to make money as the opportunity for arbitrage was at its highest level. The lack of information available to the market in the first round should allow for a pure form of free trade.
The second round operated a little bit more efficiently, as the flow of the game was beginning to be understood, and each team to experiment trading in the market. The structure of the game itself was clearly frustrating to the participants who at times were determined to coax us into altering the game to be more like double oral auction. However, the purpose of our experiment was to keep the bid/ask spreads updated and monitored.
After allowing three rounds of the experiment to take its course, we determined that the simulated market was nearing the True Value, which would have in turn ended the game and our experiment. It was at this point that we injected information into the market in the form of a Federal Reserve announcement. The bid ask spreads that were being used by each individual team were still a bit low. As a result the Fed announced, “Students at Dickinson College are in much worse shape than they believe”. This statement although simple caused the market to jump tremendously. The Bid/ Ask spreads jumped by nearly 200 dollars directly after the announcement is was made. The market was at this point much higher than the true value, but it was the immediate panic reaction by the market that caused this to happen. By simply using the word much, the market assumed that their original calculations were way off as they relied heavily on the Fed announcement contents rather than focusing on their original assessments. This is similar to how markets have been reacting with regards to recent Fed announcement regarding interest rate hikes.
The experiment itself was largely based off the fact that the players in the room had partial information, which was the total weight of their group. The total weigh of their group was just a partial segment of the total value of the asset (true value), which was the total weight of the room. Therefore as the conductors of the experiment we were able to alter the overall consensus of the actual True Value of the room was. Following the Fed announcement the market began to bracket itself around a number it believed to be the true value. However, now because of the higher value, we released an announcement from the Department of Health, “Recent Studies have shown that the average student at Dickinson, was a little lighter than originally thought.” This announcement caused the Bid/ ask spreads to come back down toward the actual true value of the room.
It was interesting to note that at this point in the game the teams were beginning to develop their own strategies for participating with in this market. Team 2 took a strategy of trying to eat up anything available in the market at that time. This however did not work as they had planned because many of the teams refused to do any business with them because of personal dislike for the leader of team two Donald. However, may teams did not realize that they would had the opportunity to sell, to Donald at this ridiculously high price, which would have allowed teams to make a lot of money selling the overvalued asset.
As the experiment continued to be repeated, the bid/ask spreads were slowly hovering in on the original true value. Team two was forced into complying with the rest of the market, as they were being completely ignored by every other participant.
Wisdom of Crowds
Crowds and groups can be an excellent source of greater information, because this game gives each individual team so little information, it would be impossible for these groups to come to the true value of the asset in question without seeing how other teams were playing and adjusting to new brought in information. That being said, crowds are often fickle, and just going along with the crowd can be beneficial in the short term, yet leave you out in the cold in the long run. There has been a history of examples, the most recent being the tech stock craze, of crowds getting caught up in the overvaluing of goods and markets, only to pay the price ten times over when the true value of these things have to speak for themselves. That being said, because the true value of this good was not reached in this game, the profits and losses of the teams can be thought of as a more short term reality. Eventually these bid ask prices would have to come down, and this would result in much more money being made by groups 1 and 3, and some lost by 2 and 4.
Zero Sum Game
The game being played by those market makers is a zero sum game in that a gain by any team in a trade results in a loss from the other. This gain or loss cannot be determined until the end of the game, when the current market (average) price is given. Then every buy you made under this price would be a gain for your market-maker, as would every sell over this number. You would loose money if the opposite of this were true. As such, since our example of the game ended before the true value of the asset had become the market price, the gains and losses by each team, while zero sum, can be thought of as a more short term phase, if the game would have gone to completion, these gains/losses would be much different for each team.
Strategies for each Individual Groups
- Group 1:
This team started round one by multiplying its own group’s weight by 4. Then seeing the other teams totals all higher at the beginning, and considering itself slightly lighter than the other Market-Makers, it increased this total by a few hundred. Interestingly the group bought at 3060 in round 2, then sold at just $10 higher in round 3. This group had nearly reached the true value of the good by round 4, but the first announcement from the “FED” caused it to react by raising its rates dramatically. These quickly came back down and by the end of the game this team was the only one who had bracketed the true market value. If the game had been allowed to continue until all teams had reached this point, this group may have had a more positive outcome. However, the current inflated market price left them with reasonable losses.
- Group 2:
This group started in the same fashion as group 1, and similarly to all the groups, by multiplying its given group weight by 4 in an attempt to guess the price, this left them slightly high. For round 2, they divided all of the groups’ initial offers by 4, and then added them together. After a few rounds trading in this area, group 2 completely changed their strategy, and began coming in with extremely high bid/ask numbers, they did this because they thought the rest of the market was undervaluing the asset, and by making such an outlandish offer, they guaranteed themselves a chance to buy from everyone. Acting extremely harshly to the initial “FED” announcement, this group failed to adjust to later notices, and this continued to hurt there situation.
- Group 3:
This group came out with an initial offer with a lot of distance between them and the other teams, it decided to use a risk averse strategy and not make a trade. Having offers that were much to low in the beginning, this group did not overly adjust to the FED announcements in round 4 and this generated profits. Finally, when the later FED statements came out that showed prices were too high, they knew they were on the right track because this price was so overvalued due to group 2’s play.
- Group 4:
The most successful group in the game, but most likely due to the fact that the game ended early. Initially thinking they were slightly on the heavy side, they dropped there weight down and then multiplied it by 4. They had a similar strategy as group 2, just not as aggressive, thinking prices were low, they inflated their bid ask prices slightly so they could sell at a higher rate if possible, or at least be able to view a lot of buy offers. The group made most of its money in the early rounds however, when it took advantage of some really low buy offers. They kicked ass.
