Finance: An Experiment Of The Financial Market Pt 1

When does this end, ten of or quarter of?

Ten of.

Ten of, so we have 13 minutes. I want to end with one experiment. I want to end with one experiment. So, this is something we’re not going to have time to figure out the answer to. So, I need sixteen volunteers. How about the first two rows? Why don’t you just volunteer. You’ll survive and I know it’s a drag but you’ll do it.

What I’m going to do now is I’m going to run an auction. So, please stand up and eight of you go on this side and eight come over here. That’s okay, you’ll be okay. I know everyone is reluctant to do this. So, I only need sixteen, TA, help me count them. Two, four, six, eight, you guys have to come the other way. The TAs aren’t going to participate. You’re not in this, right?

No.

Two, four, six, eight, so we only need eight, you both sat down. So, would you like to participate? Come on. We could use another woman here. So, can you mix these up? There are going to be eight sellers and eight buyers. So, shuffle them up and hand on to each.

So, we’ve got eight, and these are the football, they’re selling. So, we’ve got eight sellers and eight buyers, and I don’t know whether you’ve ever seen this experiment before, but shuffle them, right?

They’re all sellers, though.

They’re all sellers, but you’ve got to shuffle them. On the other side there’s a number. So, we’ve got eight sellers here and eight buyers. So, each seller knows what his football ticket is worth or hers, so please take one.

You should be one short. Here’s an extra. So, there are eight sellers and eight buyers. They’ve got the football tickets. Each of them knows what the football ticket is worth to her. So, these are the “hers.” She knows exactly what it’s worth to her. So, say it’s fifteen. The football ticket’s worth fifteen. Now, if she can sell it for more than fifteen, she’s going to do it. She’s going to make a profit. If she sells it for less than fifteen, she’s not a very good trader. She’s not going to do that. She is going to say, “If I can get more than the football ticket is worth, I’m going to sell it. If I can’t get more than its worth, I won’t sell it.”

So, everybody knows what the football ticket is worth to herself. All these guys, they know what the ticket is worth to them. So, say someone thinks it’s worth thirty that guy’s going to say, “If I can get it for less than thirty, like for fifteen, I’m going to get it. That’ll give me a profit of fifteen. If I can only get it for forty, I’m sure not going to do that because I’m paying more than I think it’s worth. So, you all got that? You have a reservation value yourself. You don’t want to pay more than it’s worth because then you’re losing money, and they want to sell it for more than they think it’s worth because then they’re making money.

So, nobody knows anybody else’s valuation. The information is distributed completely randomly across the class. Now, this is a famous experiment. I’m not the first one to run it, although I’ve done it for ten years. I do it in my graduate class, in my undergraduate class, the undergraduates, by the way, always do better than the graduate students. So, this knowledge is distributed in the whole environment, and we’re going to see what happens when I start a chaotic interaction between all of these sixteen people. What’s going to happen? And you would think it’d be total chaos and nothing sensible is going to happen.  And if that does happen, it’ll be very embarrassing for me. But, what the efficient markets guys would say is, “Something amazing is going to happen. The market is going to discover what everybody thinks it’s worth and figure out exactly the best and right thing to do and that’s what’s going to happen.

Now, it’s hard to believe that with this little preparation that you’ve had, zero, zero training, zero experience, and you’re only going to have two minutes to do this. So, see the class has got eight minutes to go. You’re going to miss the grand finale. Anyway, we only have eight minutes to go. So, with only two minutes of training, they’re going to get to a result, which if I had to do it myself and read all the numbers and sort them out and sort through them would take me much more than two minutes, and all this is going to happen in two minutes. It’s hard to believe. It probably won’t happen this time.

Finance: An Experiment Of The Financial Market Pt 1