Virtual Stock
Virtual stock markets (VSM) are an online simulation of the stock market. VSMs brings groups of participants together over electronic communication networks such as the Internet and allow them to trade on shares of virtual stocks. These shares signify a bet on the outcome of a future market situation.
VSMs were first applied in a political stock market to predict the outcome of the Bush versus Dukakis 1988 U.S. Presidential Election. The results of these studies are encouraging, as they demonstrated that the predictions derived from political stock markets outperformed opinion polls in terms of forecast accuracy.
Why Do Stock Markets Work:
VSM is based on proficient market hypothesis which states that if all available information is always fully reflected in the prices, a market is efficient. This is assured as everyone with access to relevant information can contribute and a properly designed reward mechanism motivates participants to acquire relevant information and reveal their beliefs.
The Design of VSM:
VSMs need the right design to work properly. The application of VSMs requires a well-designed incentive structure, because the desired experts might be reluctant to participate and unwilling to invest their own time and money in VSMs.
The above are the design issues in general that mandates every VSM application's design to be thoroughly discussed and tested prior to its actual application.
Application of VSM:
1. Business Forecasting:
VSM can be applied to any quantifiable business-forecasting problem where potential traders possess relevant knowledge. As such, sales, market share, profit, company stock price or time-to-market of new product introductions can be predicted.
2. New product development:
This is achieved through VSMs that instead of collecting preferences toward product concepts on the individual level, collects aggregated assessments of the participants on the future market developments.
Idea generation with VSMs
Evaluation of Product concept
Pre-sale forecasting
3. Virtual tv program rating:
The advantage of using VSM is that it requires more involvement by the user than merely passively viewing a television program. Moreover, precise demographic information can be obtained through such an interaction with the Web browser since the user can be requested to enter such precise information. Television networks, which schedule television programs, are interested in demographic information in order to be able to select television programs and to promote these television programs more effectively. Therefore, it is useful for providing accurate rating information for television programs and advertisements, as well as for promoting these television programs and advertisements
4. Sports and Political events:
Stock market that trades the outcome of sport events can be used to predict these sport events. Similarly, political stock markets can also be used for forecasting election of members of Congress.
5. Economic Indicators:
VSMs can predict economic indicators like inflation or GDP growth, unemployment rate, and so on.
6. Foreign Policy Events:
The proposed and controversial policy analysis market is an application of VSM that facilitates prediction of foreign policy events. Its goal is the prediction of political stability, and also the future events.
Advantages of VSM:
1. Objective Approach:
VSMs facilitate the aggregation of information through the market mechanism, which is considered to be an "objective" mechanism.
2. Identification of persons of ability:
The VSM can identify persons or agencies with a better ability to predict based on their performance on the VSM. Additionally, well-performing participants could be asked to conduct in-depth studies or invited to restricted, separate VSMs for confidential forecasting issues.
3. Scalability of marketing research:
This may be explained from the underlying aggregation mechanism and Internet-based technology. Unlike a single trader who may be bound to irrationality or information overload, VSMs can efficiently aggregate information for a nearly unlimited number of virtual stocks.
4. Time factor:
Unlike marketing research methods that take place over days, weeks and months, the present research is conducted rapidly, with experiments lasting under one hour. Currently we are working on the next round of experiments
5. Accessibility:
Participants can conveniently access the VSM from almost anywhere in the world at any time.
Disadvantages of VSM:
1. Confidentiality:
Such a market can not extract information while still being nonpublic even if applied within a known expert.
2. Prediction Flaws:
It might be difficult for participants to predict for future events, even if, they possess necessary knowledge for the purpose due to the existence of probability factor.
3. Translation Difficulty:
Even though a participant of VSM has knowledge about future economic or political instabilities, it would probably be difficult to translate these into a future value of such an index, being a composite measure.
4. Thin markets:
When the number of insiders is small, problems like information traps, manipulation and lack of equilibrium are exacerbated.
How to Use it :
Every participant must accept the rules upon registration in order to proceed further. Payoff values are determined according to announcement of the noble laureates. Winners must have given correct information concerning name and e-mail address. Each Participant is only allowed one account. Winners will be notified via e-mail. No litigation is possible.
How to find Suitable game:
It's easy to find a game that suits your needs. The participant will have to create his/her own game or join a private game (by invitation only) or try out one of the many public games available. In fact, they'll see the largest and newest public games highlighted on the left-hand side of all VSE pages. They can join as many games as they like. Real-time rankings are available for all members and they'll see their own customized game summary on the VSE home page. They can also view portfolio summaries for themselves and other players in their games - and in all public games. Before beginning it's important to read the Trading Rules and browse our helpful
Real World Examples:
Prices of oil-related securities were used to quantify the probability of the war in Iraq while in 2005 VSM was used to predict the value of Googles IPO.
Conclusion:
VSMs can be a great instrument provided participants understand what they are trading and why they are trading. The incentives on the VSM do not have to be large; at political stock markets, the best-performing traders have never received more than a few hundred dollars in return.
Other Articles
