Yale School of Management

The Investor Course

The purpose of the Investor course, one of the Organizational Perspective classes that first-year students are taking as part of the new Yale SOM curriculum, is to teach students about the role that investors play in an organization. How do investors decide where to allocate capital? What do different kinds of investors look for in a company?

What better way to teach students about the role of the investor than to have them play that role themselves?

One night during the second week of the course, all 208 students gathered at the New Haven Law Club to participate in the Stock Market Game, a 90 minute simulation in which players buy and sell stock of four hypothetical companies. Roger Ibbotson, professor in the practice of finance, invented the game, and he orchestrated this special session.

“I’ve run it lots of times, but each time it’s different,” says Ibbotson, because the course of the game depends on randomized variables and the intricacies of human behavior. The end-game value of each company is determined by a random draw from decks of cards, but this information is not revealed to the players right away. The game starts with an initial security analyst report, which is based on partial knowledge of each company’s value. Students can then buy private information about each company (peeks at the cards in the company’s stack), and they also receive one public earnings report on each company during the course of the game. Players are free to buy and sell shares of each stock, and the market value of each company is tracked on a screen at the front of the room. They can also borrow money, short sell a stock, or trade information with each other.

Each player begins with an identical portfolio: $200 in play cash and five shares of each company (the companies are named Red, Orange, Green, and Yellow). This is the market portfolio. At the end of the game, after adding up gains and subtracting losses and interest on loans, players compare their own holdings to the market portfolio. “The goal is to outperform the market portfolio,” says Ibbotson. It’s a simple objective, and yet a difficult one to achieve. “In order for there to be somebody overperforming the market, there has to be somebody underperforming the market. They learn the context of that and how difficult it is to be in the overperforming side.”

The recent game for the Investor class was the largest Ibbotson had run, with the entire first-year class in attendance. Once the initial security analyst reports were posted on a screen at the front of the room, students who had been eating pizza and chatting snapped into action. They formed long lines at the bankers’ tables to buy private information. They joined up in teams, and started running analyses on their laptops. One student held up a hand-lettered sign, “5% loans available here,” undercutting the rates available at the bank. A syndicate of about a dozen students pooled the information they had gathered about each company and resold it to others. Within a few minutes, trading started in the pit near the screen, one student calling out, “Anybody selling Red? Selling Red?”, and another walking through the crowd announcing, “Buying Green!”

Nick Barberis, the Stephen & Camille Schramm Professor of Finance, who led the development of the Investor course, observed the game and says he was impressed with the initiative and energy SOM students brought to the mock market. “Students attacked it with a lot of drive and sophistication. They formed teams, and people in the teams had assigned roles. There were the quantitative types hunched over their laptops with complicated models, there were the traders who would take the trading orders and try to find someone else to trade with, there were the people collecting information.”

The game was more than just play; it was intended to teach some lessons. “It illustrates some of the ideas that have come out in the course,” says Barberis. He points to the active trading market that developed during the game. “There’s a puzzle in actual markets that some people seem to trade too much,” says Barberis. Some of the reasons for such overtrading, in actual markets as well as the game market, include overconfidence and the fact that “it’s boring not to trade.” Barberis also notes that the final trading value of each stock was somewhere between the initial value and the actual end-game value of the company. “There was a sense in which markets were inefficient.” He ascribes the inefficiency in part to the phenomenon of anchoring. “Anchoring is a very common bias whereby people cling to prior bits of information, even when they’re not very relevant.”

Barberis continues, “The game fits with the interdisciplinary nature of the Investor course, in that it revealed some psychological factors, and psychology is one of the things we’re trying to bring into the course.” The Stock Market Game is one part of an overall effort to help students understand the role of the investor. The course still includes the essential topics usually taught in a business school finance course, but Barberis explains that the material is presented in a more logical way. “Taking the perspective of an investor, you’re really reminded of the fact that many disciplines enter – economics, psychology, law, even – not just finance. It’s also made the course more practical, because we’re thinking about what actual investors do. We don’t talk about subjects if, in fact, investors don’t care about them. And everything is introduced according to the way it relates to something an investor cares about.”