Kaivik Manuscript and Instructions
Kaivik: A Free Online Asset Market Cellphone Experiment with Financial Bubbles
University of Alaska Anchorage
This document describes Kaivik, a free online asset auction classroom experiment platform that works with cellphones. Students trade units of a virtual financial asset (company shares) by submitting bid and ask prices plus the number of asset units they are offering to buy or sell. This “order book” system is standard in real financial markets. Students know the true probability distribution for dividend payments each round. Contrary to rational expectations theory trading will usually generate asset market bubbles. Instructors set key experiment parameters. Results are recorded and can be presented on a screen for discussion. Students are given a lab report template to complete.
I wish to thank Kyle Hampton and Sara Jacobsen for invaluable assistance with funding, and manuscript editing, respectively.
The Financial Crisis and Asset Market Bubbles
The fourth issue of Volume 41 (2010) of The Journal of Economic Education includes a symposium on The Financial Crisis and the Teaching of Macroeconomics in which Robert J. Shiller (Shiller, 2010) discusses challenges for teaching macroeconomics following the 2007 – 2009 financial crisis. Shiller questions the effectiveness of the dominant macro teaching mode which is (still) based on presenting standard models with rational representative agents making optimal efficient choices in an environment with risk (i.e., known probabilities).
Shiller argues that the financial crisis did not conform to the standard rational expectations model. There was no exogenous real shock (such as a pandemic) to explain the crash. He notes students’ dissatisfaction with the disconnect between their standard economics models and the “economic crisis raging outside the halls of academe”. He concludes that the initial cause of the crisis was speculative bubbles, and that the psychological dimension of “animal spirits” is important and “should be an important part of what we teach”.
Financial bubbles and behavioral finance are difficult concepts for textbooks to explain. The basic problem is that there is no simple standard graphical model for an instructor to use. Asset market classroom experiments can serve as a substitute that allows students to experience and discuss bubbles, animal spirits, and departures from efficient markets.
Kaivik is a free asset market experiment that can be used to introduce students to the behavior of financial asset markets in a manner that allows the introduction of behavioral finance concepts such as animal spirits.
Consistent with micro foundations the standard economics textbook treatment of finance relies heavily on the assumption of rational behavior and risk analysis.
Developments in behavioral finance and the 2007-2009 US financial crisis have sparked a reconsideration of the strict rational expectations approach.
Kaivik runs on student cellphones and does not assume or require prior knowledge of finance. Students trade multiple asset units per single trade (an “order book” system). The experiment can be used with online courses, although in-class runs have the advantage that students can work in teams. There is no upper limit of number of students/teams who can participate.
Kaivik uses an order book trading system. In an order book system, agents submit both a price offer (a “bid” price for buying, an “ask” price for selling) plus a unit quantity offer. The order book system then automatically clears trades, with priority given to matching by price, and then matching by quantity (buyers never pay more than their bid price and sellers never sell below their ask price).
Order book trading means that market liquidity is a strategic consideration for traders: buyers seeking to buy multiple shares in one trade will have to consider offering a higher bid price than they would if they only wanted to buy a single share, and sellers of multiple shares will have to consider lowering their ask price if they wish to sell multiple shares in one trade.
For a baseline consistency in comparing results across different classes, rounds have been set to be a standard fixed length of 90 seconds long. Instructors can vary the number of rounds, the interest rate of cash holdings, the initial endowment of shares per trader, and the initial cash holdings per trader.
Following the experiment students should be required to discuss and report on their strategies and trading experience. Potential learning objectives include acquiring basic knowledge of financial asset trading, learning fundamental differences between the efficiency of real goods markets and financial markets, behavioral aspects of trade in financial markets, the efficiency of financial markets under conditions of uncertainty, and parallels with historical financial asset bubbles such as the US housing bubble of 2007-2009 and the Dutch tulip mania bubble.
Asset Market Experiments
The precursor to classroom finance experiments is the 1988 research “asset market” experiment by Smith, Suchanek, and Williams (1988) which demonstrated that even under conditions of full knowledge of all relevant probabilities of future asset dividends there can be a replicable tendency for a financial asset market price to shoot above the fundamental value, then to crash before the final expiration date.
The financial bubble research experiment result presents a radical contrast with the efficiency and rational behavior of the classic double oral auction real goods demand and supply experiment (Smith, 1962).
There are several classroom versions of the financial bubble experiment. Paper and pencil versions have been created by Bell (1993) and Ball and Holt (1998). Bostian and Holt (2009) created a free web-based version, with students using laptops, with an order book trading system, available for instructors to use, at the Veconlab website at the University of Virginia. Moinas and Pouget (2016) created a variation called the classroom Bubble Game. This experiment is a one-shot paper and pencil strategy game. Moblab.com, the economic games and experiments company, has an online asset market game in its portfolio. The Moblab Asset Market (Bubbles and Crashes) game allows instructors to set parameters and has tools to assist in debriefing and enhancing learning. However Moblab requires that students subscribe to the Moblab site.
Classroom asset market experiments differ in delivery mode but share key common elements:
- Participants (traders/teams) start with an identical endowment of cash, and identical endowments of the asset: company shares which generate dividends every period.
- Every period each unit of the asset generates a random dividend, the dividend being identical for every share regardless of owner.
- The probability distribution for dividends is identical every period and known to traders.
- There is a fixed known number of trading periods, every period of equal length.
- Participants can buy or sell shares every period.
- Shares have zero redemption value at the end of the last period.
The surprising and usual result of the asset market experiment is that asset prices for shares start lower than the expected value of all future dividends but increase to a peak well above expected value around the mid-point, then collapse before the end of the experiment.
At the conclusion of the experiment students are debriefed and the class discusses potential explanations and implications of the results. Students can be assigned to write experiment reports. Teams should be rewarded with cash according to a preannounced reward rule: for example, Bostian et al randomly select a student to be rewarded according to a formula. The classroom analysis and discussion can include topics and concepts including: animal spirits; risk; efficient markets theory; probability; liquidity, market strategy, and the concept of financial market fundamentals. The experiment can be linked to episodes in history such as the Dutch tulip bubble mania of the 1600s and more recently the US housing bubble of 2005-2006.
Setting Up Kaivik: First Time Instructions
The first time an instructor uses Kaivik they will set up a personal free account on the Kaivik server. This allows the creation of financial market experiments by using the Professor Dashboard.
The instructor needs to save their personal login email and password for future reference.
The Dashboard will keep a permanent record for each experiment under a unique ten letter upper case run code like “JTBGOHLPDM”. This allows instructors to compare results with those of previous classes.
Each run of the experiment is linked with to a unique “Room” with the ten-letter run code that can be used to retrieve the record of that run. When using Kaivik the word “room” actually means a single specific experiment run. The instructor needs to keep a record of the unique code for each run.
Setting Up Kaivik: Setting Up an Experiment Run
The order of steps for the instructor to set up the parameters are:
- Navigate to https://kaivik.us
- Enter your login email and password
- On the Professor Dashboard, click add new “room” and record the unique ten letter room identification code (as well the date and course) from the upper left text entry box
- Click “Go to……” filling in the ten-letter code for the new room that was added and now appears in “Open Rooms”
- The instructor sets the parameter values for the number of rounds, initial cash endowment per team, initial share endowment per team, and probability distributions of share dividends each round.
The order of steps for running an experiment are:
- Instruct students to navigate to https://kaivik.us
- Tell the students the room code for the run. Only one student device per team should join the waiting room for the game.
- The team types in a chosen team name, and the room code, in the two boxes.
- Team names will appear at the bottom of the Professor Dashboard showing teams have joined the game.
- The instructor clicks “Launch Room”.
- The trading interface will appear automatically on students’ cellphones and teams should begin trading immediately. Teams can switch between bidding and asking within a round.
- The instructor monitors the experiment progress via the Professor Dashboard, which projects the order book for the market in real time.
- Students cannot see the market order book during trading, students can only see their cellphone trading screen. Only the instructor sees the order book behavior.
- At the end of the game the instructor will be directed to a room review/debrief screen for projecting to the class.
End of Experiment Student Trading Record Screen (visible to students)
Student Reports Template
Students should always complete a graded experiment report:
- Name of the experiment?
- Date of the experiment?
- Who was in your team?
- How many rounds in the experiment?
- What were the experiment rules?
- What was your strategy?
- How well did you do?
- If you repeated the game would you change your strategy? How would you change it?
- Describe and explain what happened to share prices. Why did this happen?
- What economics principles does this experiment demonstrate?
Student Sample Reports: summary of results
Students (Intermediate Macroeconomics, and Money and Banking) reported that the main economic principles they learned were: investment risk; how supply and demand predicts prices; what financial bubbles were; and the influence of speculation in financial markets.
The main recurring themes and ideas reported were: the importance of having a strategy; anticipating the actions of other students; the impact of psychology; that the bubble collapse was predictable but each team thought it could exit trading before the collapse. The immersive nature of the experiment was commented on multiple times; “my brain was pretending this situation was in real life.”
In this paper the authors present a free online asset auction classroom experiment platform that works with cellphones. Student teams trade units of shares in a hypothetical company. Trading uses an order book system that allows students to buy or sell multiple shares in one transaction. Instructors can choose key parameter values: number of rounds; initial cash endowment per team; initial share endowment per team; and probability distribution of payouts each round per share.
Following the experiment students should be required to discuss and report on their strategies and trading experience. Potential learning objectives include: acquiring basic knowledge of financial asset trading; learning fundamental differences between the efficiency of real goods markets and financial markets; behavioral aspects of trade in financial market; and the efficiency of financial markets under conditions of uncertainty. The experiment will frequently generate financial bubbles.
Ball, Sheryl B., and Charles A. Holt. 1998. Classroom games: Speculation and bubbles in an asset market. The Journal of Economic Perspectives 12, (1) (Winter): 207-218,
Bartlett, Robin L., and Paul G. King. "Teaching Economics as a Laboratory Science." The Journal of Economic Education 21, no. 2 (1990): 181-93. Accessed June 30, 2021. doi:10.2307/1181984.
Bell, Christopher R. "A Noncomputerized Version of the Williams and Walker Stock Market Experiment in a Finance Course." The Journal of Economic Education 24, no. 4 (1993): 317-23. Accessed June 30, 2021. doi:10.2307/1183044.
Bostian, AJ A., and Charles A. Holt. "Price Bubbles with Discounting: A Web-Based Classroom Experiment." The Journal of Economic Education 40, no. 1 (2009): 27-37. Accessed June 30, 2021. http://www.jstor.org.proxy.consortiumlibrary.org/stable/25765986.
Moinas, Sophie, and Sébastien Pouget. “The Bubble Game: A Classroom Experiment.” Southern Economic Journal 82, no. 4 (April 2016): 1402–12. doi:10.1002/soej.12119
Shiller, Robert J. "How Should the Financial Crisis Change How We Teach Economics?" The Journal of Economic Education 41, no. 4 (2010): 403-09. Accessed June 30, 2021. http://www.jstor.org/stable/25766079.
Smith, Vernon L. "An Experimental Study of Competitive Market Behavior." Journal of Political Economy 70, no. 2 (1962): 111-37. Accessed June 30, 2021. http://www.jstor.org/stable/1861810.
Smith, Vernon L., Gerry L. Suchanek, and Arlington W. Williams. 1988. Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset. Econometrica (1986-1998) 56, (5) (09):