Brian Shiau talks back to Robin Hanson and Keith Jacks Gamble:
[...] Many players realized early on that share prices on the simExchange are completely based on what other people are willing to pay: [...]
[...] Empirical evidence of trading on the simExchange has demonstrated at least some [market] efficiency. [...]
Players who did not trade in the direction implied by the news lost DKP while those who did gained DKP. As predicted by market theory, eventually, these players learn to trade with sales figures or they run out of money. However, like the real stock market, the simExchange is not immune to bubbles. If people become irrationally exuberant for a game, the stock may be priced very high. This is all part of simulating a stock market.
Additionally, as in any game, the admins can wield the awesome power of Non-Player Characters (NPC), in this case market makers with infinite money, that can encourage players back to rational trading.
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Thanks for the response. It’s interesting to see examples of product news stories and how your markets responded. These examples suggest that your game share prices are connected with sales. I’m not surprised and Keynes wouldn’t be either. His beauty contest view explains exactly why prices on the simExchange are connected to sales despite the fact that game shares have no intrinsic connection to sales (no dividends based on sales, nor the possibility to liquidate based on actual sales). The traders’ comments you mentioned confirm that traders have picked up on this point and are buying and selling in anticipation of other traders’ actions. Certainly, a lot of trading on Wall Street works the same way.
My point that game shares have no intrinsic value, unlike Wall Street shares, has two implications. First, it’s one reason that prices on the simExchange may deviate more from actual sales than prices on Wall Street exchanges deviate from actual value. Importantly, this statement doesn’t say that simExchanges prices will deviate more, nor does it say that any deviation will be large. Further, your simExchange has at least one advantage for keeping prices near sales that Wall Street does not have: your market makers have infinite resources to keep prices at reasonable levels. Second, although irrelevant since the simExchange uses play money, the fact that game shares have no intrinsic value prevents the simExchange from ever working with real money.
SimExchange could work with real money by using something like Shiller’s “perpetual futures“.
Again, another advantage of SimExchange is that because of the obsolescence of game titles, while the contracts are perpetual, they effectively are not “perpetuities”, and will react more straightforwardly to incoming data. The data just has to be reasonably accurate and frequent.
How to discount those future sales is a consequence of the play-money / rank-order structure of the exchange. Essentially the risk appetites that such an game causes will lead to a very high discount rate on sales in subsequent years. In other words, traders want to catch the initial high percentage 100,000 to 1 million move, and don’t care so much about the 1.5mm to 1.75mm move in year three.
This is also a consequence of the margining system, whereby it looks as though buyers must freeze the full value of a contract even though the value should not go down in terms of actual sales, barring a restatement. Sellers only need to freeze a certain percentage of the contract value though, and this asymmetry could further mitigate buying manipulations.