"Almost everybody that I spoke to had the same strategy—I know this is a bubble, I'm going to ride it onthe way up and I'll be able to get out before it breaks."
-Beijing University finance professor, Michael Pettis, as quoted on NPR.
Watching the gyrations of Chinese stock markets this week—almost a 13% drop followed by a partial recovery—made me recall Prof. Pettis’ assessment that at least some of what is going on is a classic speculative bubble (and crash). In its most extreme form, everyone knows that an asset’s earnings cannot justify today’s price, but the possibility of finding a greater fool tomorrow entices you into purchasing today. After all, this strategy worked out rather well for the trader you are buying the asset from . . .
Some students will recognize this logic in other asset markets (U.S. housing before the financial crisis and perhaps even current valuations of tech firms). Others will be more skeptical, and might even add that they would never gamble like this. With MobLab’s asset-market game, Bubbles and Crashes, you can have your students experience firsthand the highs and lows of speculative investing.
Our game is inspired by the groundbreaking experiments of Smith, Suchanek and Williams (1998) and Bostian and Holt’s (2009) classroom experiment. At the beginning of the game, each student receives some amount of cash and number of shares in a company that pays a random per-period dividend. During each round, students participate in a double auction to buy or sell these shares. Will we can get an asset bubble? Despite best efforts to make it easy to figure out the asset’s maximal payout if held to the end, many of your student groups will experience clearly defined bubbles with prices above this maximal payout. This of course means that they will also experience the “thrill” of trying to sell as the fools disappear (or wisen up) and the price crashes. I guess the good news is that you will find both bubble likelihood and severity decrease as your student-groups gain experience. I can only speculate whether this makes a particular student more or less likely to invest in the next hot tech IPO . . .