Aparato Dige.Álvarez Vela Álvarez Vela, Julio

Welcome to the experiment

This is an experiment on decision making in financial markets. The experiment is straightforward and the instructions are easy to understand. If you follow them carefully and make good decisions, you could earn a considerable amount of money, which will be paid to you in cash at the end of the experiment.

Experiment Overview

In this experiment you participate in a simple market. The market will take place over a sequence of 13 trading periods. You may think of each trading period as a “business or trading day”. In this market a generic asset (“financial good”) is being traded and, at any moment during each trading period, you are free to buy or sell the asset. The money used in this experiment is “Experimental Currency Units” (ECU). Your cash payment at the end of the experiment will be in Euro. The conversion rate will be 200 ECU to 1 Euro.

In this experiment you make money either by trading the asset or from the dividend on the asset.

General Instructions

The market consists of 9 participants and 13 trading periods. Each trading period will last 300 seconds, during which you can trade the asset in exchange for experimental money. The first period is a trial period, useful to understand the trading mechanism. In the trial period no money will be paid for your earnings. The remaining 12 trading periods are “real” periods and they will count for your earnings. At the beginning of each trading period, you will be endowed with 200 ECU and 10 units of the asset. At the end of each trading period, the asset will pay a dividend of either 10 or 20. At the beginning of each period, the dividend value will be randomly chosen by the experimenter and not revealed to the market participants. Then, with 50% chance the dividend will be 10 and with 50% chance the dividend will be 20. At the start of each trading period, with 50% chance, none of you will have information about the value of the dividend in that trading period and, with 50% chance, only 5 of you out of 9 will be informed about the true dividend that the asset will pay at the end of that trading period.

Buying and selling the asset

At the beginning of each trading period, the screen will show you your initial amount of money, the number of units of asset in portfolio and a signal about your information on the dividend.

You could receive one of the following two signals:

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2. “The value of the dividend is “x” (with “x” = “10” or “20”)

If you receive the signal “you have no information", it means that you do not have any information about the dividend the asset will pay at the end of that trading period. If this is the case, it may be either that you are in a trading period where nobody is informed about the dividend or that you are in a trading period where only 5 of you have information on the dividend and you are not among these five people. If you receive the signal “10” or “20”, it means that the true dividend is 10 or 20 respectively. In this case, for sure you are in a trading period where only 5 of you have information on the dividend and you are among these five people. The identity of informed people will be randomly chosen by the computer in each trading period.

How to use a computerized market

As reported in Figure 1, on the top left of the screen you will see the trading period in which you are trading. On the top right of the screen you will see how much time is left in the current trading period. In the center of the screen you will see your amount of money, the number of assets you own and your signal.

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You can participate to the market in the following four ways:

1. Making an offer to sell the asset, by entering the price at which you are willing to sell.

To offer to sell a unit of the asset, enter the price at which you would like to sell in the box labeled “Your offer to sell” in the first column from the left of the screen, then click on the button “Offer to sell” on the bottom of the same column.

The second column from right will show a list of offers to sell, each submitted by a different participant. The lowest offer to sell will be always placed on the bottom of the list. Your own offer will appear in blue.

2. Making an offer to buy the asset, by entering the price at which you are willing to buy.

To offer to buy a unit of the asset, enter the price at which you would like to buy in the box labeled “Your offer to buy” in the first column from the right of the screen, then click on the button “Offer to buy” on the bottom of the same column. The second column from left will show a list of offers to buy, each submitted by a different participant. The highest offer to buy will be always placed on the bottom of the list. Your own offer will appear in blue.

3. Selling an asset by accepting an offer to buy.

You can select an offer to buy from the second column from the left by clicking on it. If you click the “sell” button at the bottom of this column, you will sell one unit of the asset at the selected price. You are not allowed to sell a unit of the asset to yourself. When you accept an offer to buy, it will disappear from the list. If you also previously submitted an offer to sell, it will disappear from the offers to sell because you have just sold a unit of your asset.

4. Buying an asset by accepting an offer to sell.

You can select an offer to sell from the second column from the right by clicking on it. If you click the “buy” button at the bottom of this column, you will purchase one unit of the asset at the selected price. You are not allowed to buy a unit of the asset from yourself. When you accept an offer to sell, it will disappear from the list. If you also previously submitted an offer to buy, it will disappear from the offers to buy because you have just bought a unit of your asset.

You can only buy/sell one unit of the asset at a time. You can buy/sell several times in each trading period. When you buy an asset, the amount of your money will decrease by the price of purchase. You can only buy an asset if you have enough money to pay for it. When you sell an asset, the amount of your money will increase by the price of the sale. You can sell units of asset as long as you own them in portfolio. In the middle column of the screen, labeled “Transaction Prices”, you

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will see the prices at which the units of the asset have been traded in the current trading period. Any time you accept an offer to sell or buy, a new contract has been closed and the selected price will appear in the column “Transactions Prices”.

Your Earnings

As reported in figure 2, at the end of each trading period your profit will be equal to your “Money before payment of dividends” minus “Initial Money” plus “Your total dividend”.

At the end of the experiment, your final earnings will be equal to the sum of your profits in each of the twelve “real” trading periods (the trial period does not count).

Figure 2: Your earnings

The following scheme shows the composition of your earnings for each period:

Initial Money (200 ECU) –

(Nr. of assets you bought x market price) + = Money before payment of dividends (Nr. of assets you sold x market price)

-

Initial Money (200 ECU) +

Dividend of the period x

= Your total dividend Nr. of assets at the end of the period

=

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APPENDIX B