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by Anna Bratulic
Stock markets not only inform us about the prices of different commodities,
but also offer insights into human behaviour in general. If economic theory
is correct — that people offered real economic incentives will reveal
their true inclinations and preferences in their dealings with one another
— then market prices should tell us something about people’s
needs, prospects, forecasts, even their voting intentions.
Some years ago, Professor Bob Forsythe, of the University of Iowa, set
up a Web-based political futures market, where traders use real money
to speculate on the outcomes of presidential and congressional elections.
This market has apparently been forecasting accurate election outcomes
since its inception in 1988. To illustrate with a contemporary example,
if Texas governor George W. Bush was trading for $10 and vice-president
Al Gore was only going for $5, then Bush would likely be the next American
president.
Finance Professor Gregory Lypny explains, “A well-functioning market
can predict an outcome better than an opinion poll because people have
to put their money where their mouths are. People don’t always do
what they say they will when they’re polled because there’s
nothing at stake.”
A duck can learn to use
it
Lypny has programmed his own online stock market, called Borsa (which
means purse in Italian). Nine students offered and traded two securities
on Borsa during a one-month dry run this summer. In all, there were 369
offers and 38 trades, for a total of 407 transactions. The person with
the most money in their account at the end received $75 as a prize, and
all the others received smaller prizes in line with their ending cash
balances.
Lypny had the idea for Borsa in 1993, but programming for the Internet
was too complicated at the time and didn’t afford him the personal
control he wanted. “Now, the technology is so cheap and powerful
that, really, a duck can learn to use it. I can create an online database
that tallies people’s transactions in a matter of days.”
Borsa will be used as a teaching tool for Lypny’s classes, as well
as a research tool that will allow him to conduct formal experiments on
the determination of security prices in general equilibrium — why
bond and stock prices are what they are, and how they move relative to
one another.
During this summer’s experiment, Borsa was open 24 hours a day. Each
of the nine traders started off with the same amount of cash and portfolio
of securities, but no one knew that everyone else was starting off at
the same financial position. The nice thing about the programs, Lypny
claims, is that almost all variables can be easily modified to create
different experimental scenarios.
For instance, more people can participate. Lypny wants to have the students
in his classes — up to 150 this semester — to be registered
to use Borsa by late September. The technology imposes no limit on the
number of people who can trade on Borsa, save for the power of the computer
running it. In fact, Lypny’s “old Mac” can probably handle
a few thousand trades a day across Canada, which is what he would like
to happen eventually.
“The purpose of the trial run [this summer] was to see whether I
could keep people interested over a period of time,” he said, adding
that time is a factor a lot of economic experiments lack.
“Typically, students do [economic] lab experiments in three-hour
games. It’s hard to embed any significant time element in such games,”
Lypny said.
Decisions involving time and the immediacy of satisfaction fascinate him.
A person not in dire financial straits given the choice of getting $1,000
tomorrow or $1,500 guaranteed in one year would most likely choose the
$1,000 tomorrow, according to Lypny, even though they would be giving
up a 50-per-cent rate of return. “It’s irrational, but that’s
the way people behave,” he said.
Lypny hopes his students will better understand principles of economic
theory after trading on Borsa. When the data is collected from the program’s
transaction logs, they will discuss it in class. “What does this
mean? What does that mean? The data came from you — you are the market,
after all. It really gets them scratching their heads,” he said,
adding that the students do not simply study the theory, they “become”
the theory.
“Those who have done some investing say they’ve recognized parallels
between real-life investing and Borsa.”
Anyone who wants to know more information about Borsa can visit the following
Web site: http://rubbersoul.concordia.ca/pareto
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