Keith Jacks Gamble: simExchange is somewhat OK, but will remained confined in play-money land.

Keith Jacks Gamble on Brian Shiau:

Thanks for the response. Ita€™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. Ia€™m not surprised and Keynes wouldna€™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 tradersa€™ comments you mentioned confirm that traders have picked up on this point and are buying and selling in anticipation of other tradersa€™ 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, ita€™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 doesna€™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.

Previous: Brian Shiau: The Sim Exchange Works Fine, Thanks.

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Previous: An invitation to join the simExchange beta + Since November 9, 2006, the Sim Exchange has attracted over 2,400 registered players. + Sim Exchange –- How to earn additional money? + The Sim Exchange: Basic Trading vs. Advanced Trading + BetFair, Sim Exchange = Vertical Prediction Exchanges, First

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6 thoughts on “Keith Jacks Gamble: simExchange is somewhat OK, but will remained confined in play-money land.

  1. Jason Ruspini said:

    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 a 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.

  2. Keith Jacks Gamble said:

    I think the simExchange is great and works great. The second point of my original post “simExchange a Keynesian beauty contest” is to explain why it works. My first point was to critique Shiau’s analogy of game stocks to Wall Street stocks. While I agree there are similarities, there is one big difference (shares have no intrinsic value) that I wanted to emphasize for Midas Oracle readers, who are crazy about the workings of prediction markets. Even so, I think Shiau’s analogy is a great way to explain the simExchange to a broad audience.

    I agree that the simExchange could work with real money using other types of securities; my point is that it could never work in its current form. If it could, then the exchange could expect to make a gozillion dollars from IPOs of game shares. In a corporate IPO, the owners give up some of their claim on the assets of the company in exchange for cash. Since game shares aren’t claims on anything tangible, a game stock IPO would generate free money for the exchange.

  3. Jason Ruspini said:

    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 a 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.

  4. Keith Jacks Gamble said:

    I think the simExchange is great and works great. The second point of my original post “simExchange a Keynesian beauty contest” is to explain why it works. My first point was to critique Shiau’s analogy of game stocks to Wall Street stocks. While I agree there are similarities, there is one big difference (shares have no intrinsic value) that I wanted to emphasize for Midas Oracle readers, who are crazy about the workings of prediction markets. Even so, I think Shiau’s analogy is a great way to explain the simExchange to a broad audience.

    I agree that the simExchange could work with real money using other types of securities; my point is that it could never work in its current form. If it could, then the exchange could expect to make a gozillion dollars from IPOs of game shares. In a corporate IPO, the owners give up some of their claim on the assets of the company in exchange for cash. Since game shares aren’t claims on anything tangible, a game stock IPO would generate free money for the exchange.

  5. Jason Ruspini said:

    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 a 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.

  6. Keith Jacks Gamble said:

    I think the simExchange is great and works great. The second point of my original post “simExchange a Keynesian beauty contest” is to explain why it works. My first point was to critique Shiau’s analogy of game stocks to Wall Street stocks. While I agree there are similarities, there is one big difference (shares have no intrinsic value) that I wanted to emphasize for Midas Oracle readers, who are crazy about the workings of prediction markets. Even so, I think Shiau’s analogy is a great way to explain the simExchange to a broad audience.

    I agree that the simExchange could work with real money using other types of securities; my point is that it could never work in its current form. If it could, then the exchange could expect to make a gozillion dollars from IPOs of game shares. In a corporate IPO, the owners give up some of their claim on the assets of the company in exchange for cash. Since game shares aren’t claims on anything tangible, a game stock IPO would generate free money for the exchange.

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