This was my second time participating in the bubble experiment we did in class last week so I knew a few things ahead of time. I knew that prices weren’t going to fall with the value of the asset and I knew that the best course of action was to buy up as many assets in the beginning and sit on them until near the end. By using this method I thought I would be able to earn a profit on the items but still be able to sell them for roughly what I paid for them. Even though I knew this was what I should do and the market should go through the bubble it was difficult for me to keep it up.
I kept thinking to myself that the market was going to crash before I could sell everything or that I should continue to buy even into the final rounds. I knew that my plan would work if I remembered to sell before the bubble collapsed and I just missed that point.
By the 5th round I think I had somewhere around 8 or 9 assets that I was sitting on. They were yielding a pretty good profit so I wanted to continue to sit on them. As the rounds got closer and closer to closing I kept thinking that I needed to sell but I didn’t want to give up my earnings for next round. I ended up selling just as I saw prices thinning out in the upper region and this may not have been the best idea. Luckily for me however I hit the high end of the collapse and I was able to sell all of my goods for over 200 points, some even for 350. At that point it hit me that I had fallen prey to what I tried not to and had gotten absorbed in the bubble, trying to squeeze every last penny out of it, despite the fact that it was incredibly risky.
Looking back I realize that one of my errors was trying to sell everything off at once. I knew that I had to get rid of my assets so I tried dumping them all on the highest available bidder. This however, made the price plummet. I would take the highest bidders but that meant I had to keep dropping down to their price level. I had to do it this way but I think if I had slowly sold off my assets I would have gotten a lot more money in the end.
This effect relates back to the Wisdom of Crowds when the author talks about the giant hedge fund, LTCM. LTCM tried to sell their stocks before they plummeted to zero but in doing so they drove the whole market even further down. Looking back they probably realize that they could have prevented their fall if they had sold sooner or used a better tactic but as they say hindsight is 20/20.
What really interested me about this experiment and its application in real life is how often we all fall prey to it. I do not understand why we constantly find ourselves in a bubble despite professionals’ and analysts’ warnings. Even though I knew what was happening in the experiment I still had trouble staying out of it and in the end wound up as absorbed as everyone else.
There was one group, however, who seemed to stay out of it fairly well and that was the group that always bid the projected value many times at the beginning of each round. As far as I know they didn’t buy ridiculously priced assets to later regret it but I’m not sure if they made a lot of money either. Maybe in the end riding a bubble is the best way to make money but you still need to know when to stop and that is what is really difficult.
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It seems as though people "fall prey" to bubbles simply as an anxious reaction to "dumping" or selling assets in a market. The trouble with stock markets is that they, like any free market, really have no guarantees attached to them. When one buys a share, he or she is taking a risk. And with all risks, there comes anxiety. Not knowing why other people in the market are suddenly selling or not selling assets can cause alarm in members of the stock market, which leads to bubbles and crashing. There may be nothing "wrong" with the market, but speculation and assumptions are what cause players in the market to react. This can often lead to a ripple effect and thus, major crashing. To tie into one of the major themes of this course, we see that emotions play a huge role in the stock market, the same way they do in the free market. People in the free market often exchange based on a system of trust, justice, and fairness. Therefore, people often exchange with others based on how well they believe these said "others" will uphold these qualities. If they begin to find themselves in a situation where they may not be met with these values, they begin to react by retracting their trade partnership. Similarly, in the stock market, if people loose trust in its ability to reward them for owning assets, they react by trying to remove themselves from the stock market. This anxious reaction, once again, is what can often lead to bubbles and crashes in the stock market.
It seems to me that most of us were on the same page in regards to not being able to identify when exactly to get out before the bubble burst. You mentioned something rather interesting, that is, ‘how often we all fall prey to it in real life’ even when we are aware that sooner or later the market will eventually collapse. I’m also not sure why we find ourselves in bubbles despite the warnings we receive. But one thing that I noted after reading Surowiecki’s book The Wisdom of Crowds is that “you don’t see bubbles in the real economy, which is to say the economy where you buy and sell television sets and apples and haircuts.” You don’t see “the price of televisions suddenly double overnight, only to crash a few months later.” It seems that we find ourselves in bubbles when we engage in impersonal transactions rather than in personal markets.
For example, when people see that television sets or haircuts are rising in prices it seems that they don’t develop an interest in buying this good or service whereas in a bubble the opposite happens. Additionally, when a person looks to profit from buying the stock of a particular company one is also “buying the right to resell that share of stock to someone else” that expects to profit as well. Thus, part of the problem seems to be that no one knows when the market will come to an end. As a result, people end up trapped without being able to liquidate their assets as it happened to us in our experiment. “Just as we don’t have a good account of why crashes occur, we don’t really have a good sense yet why bubbles start,” as Surowiecki argues. However, as soon as we began mirroring each other during our experiment our wisdom as a group declined substantially. Perhaps this could partially explain why bubbles are created and why bubbles burst in our markets.
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