The bubble experiment/what is a bubble?

[BitterTea]

I listened to this interesting PlanetMoney podcast yesterday, it gave me a wonderful idea. Kiba, I think you'll like this.

In the lab, they set up the world's simplest stock market. There's one stock that the students can trade. At the end of every round of trading, the stock pays a small dividend — an average of $1, say. At the end of the game, the stock is worth nothing. So if there are 10 rounds left in the game, the stock should be worth $10.

They make this very simple for the students, who have computer screens that tell them exactly how much the stock should be worth.

But the price of the stock still almost always shoots way up over the expected value. Then, at some point before the end of the experiment, it crashes.

One time, in the middle of a bubble, Williams pointed out the apparent insanity of what the students were doing. That made the stock price go up faster.

"Showing people that the market was in a price bubble just fueled the price bubble even more," he says.

We need to do this with bitcoins!

[Anders]

I have an idea about developing a virtual stock market using bitcoins. In the past I had a similar such service that used beenz.

[kiba]

Let have some bubble comic!  http://bitcoinweekly.com/articles/comic-reaction-after-dramatic-rise-of-bitcoin-s-value

[benjamindees]

See, the problem with this experiment is that they didn't also lock the students in the room for several days and charge them for all of their meals.

Which is the reason we see the exact same behavior in real financial markets.  There is absolutely no consequence to failure.

[Anders]

I have an idea about developing a virtual stock market using bitcoins. In the past I had a similar such service that used beenz.

On a second though, maybe there are legal concerns about setting up trade systems, even if it's 'just' with digital currency and only virtual stocks. Yikes! I think I will drop the idea of developing a virtual stock market for bitcoins.

[kiba]

http://glbse.com ?

[proudhon]

I listened to this interesting PlanetMoney podcast yesterday, it gave me a wonderful idea. Kiba, I think you'll like this.

In the lab, they set up the world's simplest stock market. There's one stock that the students can trade. At the end of every round of trading, the stock pays a small dividend — an average of $1, say. At the end of the game, the stock is worth nothing. So if there are 10 rounds left in the game, the stock should be worth $10.

They make this very simple for the students, who have computer screens that tell them exactly how much the stock should be worth.

But the price of the stock still almost always shoots way up over the expected value. Then, at some point before the end of the experiment, it crashes.

One time, in the middle of a bubble, Williams pointed out the apparent insanity of what the students were doing. That made the stock price go up faster.

"Showing people that the market was in a price bubble just fueled the price bubble even more," he says.

We need to do this with bitcoins!

I thought that's what was already going on.

[BitterTea]

I thought that's what was already going on.

Not unless you know the fundamental value of a Bitcoin, and are able to determine that it's current trading price is significantly out of line with its that value.

GOLDSTEIN: The people in the experiment, they were buying the stocks for sometimes for more than it could ever pay out. And this gives us a definition of a bubble: It's when the price of something rises way above what you might call its fundamental value.

KESTENBAUM: So let's apply that definition to gold: Is gold in a bubble? Here's Tim Harford. He's an economist and a columnist at the Financial Times.

Mr. TIM HARFORD (Economist and Columnist, Financial Times): Gold is a tricky one, and here's why. Remember we said bubbles should be defined in terms of fundamental values? The price of corporate stock should be looking at future profits, and you need to make your best judgment on what that would be.

But price of gold, it's just not clear what the fundamental value of gold is. I mean, it's worth something because people have always thought it's worth something. And that's really weird, because what that really tells you is, well, gold's in a 4,000-year-old bubble. And if it's lasted 4,000 years, maybe it'll last another 4,000 years. Who am I to say?

To clarify, when I said "we should do this with bitcoins", what I meant was to set up a system similar to their simple stock market, except you would play the "game" with your real bitcoins.