Mark Gritter (markgritter) wrote,
Mark Gritter
markgritter

Stock Market Game

In the business section of the Star Trib today, I saw an advertisement about the "Stock Market Game". It is a competition for students where they manage a $100,000 portfolio and are ranked by portfolio value.

(See http://www.bestprep.org/smg.html and http://www.stockmarketgame.org/)

Two thoughts came to mind. First, an individual school could maximize its chances of having one of its teams win by having the teams coordinate to choose negatively-correlated portfolios. The game does appear to allow short selling, so team A could go long on a volatile stock while team B shorts it. (With more teams you can develop a more diversified basket, using the perfect prediction scam to ensure at least one team has only winners.)

A coach could offer prizes to the class as a whole to encourage this sort of coordination, aimed at maximizing the chances that one of the teams will win big and win the award "for the school." Not that finding good candidates for this sort of strategy is necessarily easy... and may well teach something valuable about finance.

But my second thought is that, as an exercise in portfolio management, the incentives are all wrong. A responsible portfolio manager adjusts holdings to his or her client's level of risk tolerance. But in the game there's no downside to ending up with only $10,000 or even $0, and maybe even some perverse pleasure in doing so. Since the tolerance for risk is effectively infinite (at least at the start of the game--- maybe less so if a team thinks they can 'lock in a win') the correct portfolio choices may be very different from any real-life decisions.
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