I had never participated in this type of bubble experiment before, but I very quickly made two assumptions about the experiment that would guide my actions. First, I realized that the prices being paid in the exchange market were not going to adjust to the real value of the asset each round. The price of the asset was not going to fluctuate much until later rounds when the dividend value of assets dropped significantly. Secondly, there would be a collapse in the market at a certain point. I also assumed the majority of the other participants would see what I saw. So in order to outperform the market in this experiment I would have to predict the collapse of the bubble, or be innovative and find another way to exploit the market.
I tried to exploit the unstable prices of the early action by buying assets. My hope was that the early prices would be lower than the price that they later stabilized at. I actually had no intention of holding these assets; I figured I could flip them quickly and use the additional profits to purchase more assets to hold. After a few rounds the prices had stabilized and I had a decent number of assets that were yielding a good dividend, so my next priority was to sell before the bubble crashed. I failed miserably at that.
I was concerned that if people saw that assets were being dumped it would lead to an immediate bubble crash, so I tried to sell slowly over a couple of rounds. I started selling too late, and the bubble burst on me before I had a chance to liquidate everything. I sold some of my assets but I held on to some for all 15 rounds, just taking the dividend payment.
I had gotten sucked into the bubble and was caught trying to maximize profits in a market that I knew was unstable. In hindsight I think I should have dumped my assets quickly instead of selling over a period of time. In a real market where transactions are public, dumping may drive the market down, but in our experiment each transaction was private so there was no way differentiate dumping from a normal sale of an asset.
This experiment showed me how easy it is to fall prey to the collapse of a bubble, even if you know it is coming. It becomes incredibly hard to sell since everyone else continues to make money. People obsess over profits to the point that it becomes a competition. Even if two people profit from an investment, the one who made more is somehow the winner; it becomes a zero sum game.
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I think we all made the same assumptions as you did about the experiment, so it turned into something like a game of chicken until the end round, with us all waiting to see who would drop their price or buy at the prevailing price. We were all waiting or trying to predict when the bubble would burst, even though we were creating said bubble. It’s a little bizarre to think of it in that way, but that’s what it was. I was working with a partner, and we kept trying to figure out how much we had made off of each asset and at what price we would be willing to sell it. In retrospect, this was pretty ridiculous because what really mattered to us in the long run (and what we failed at) was selling the bonds before the market took a dive. This experiment gave me a good perspective on market bubbles and just how logical they can seem in the middle of the action even as you are getting caught up in an asset you know will be absolutely meaningless in fifteen minutes.
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