The Stock Market Game -Investing or Gambling?

Last Updated Jul 14, 2010 12:15 PM EDT

The Stock Market Game (SMG) is a program of SIMFA Foundation for Investor Education. I'm of the opinion that what it teaches is gambling rather than investing, and to test that theory I conducted an experiment last spring in an investments class I teach at Colorado College. My students not only played according to the rules, but also with some small changes I made that completely altered the portfolios selected.

The Stock Market Game - Background
According to its website, the "SMG gives students the chance to invest a hypothetical $100,000 in an on-line portfolio. They think they're playing a game. You know they're learning economic and financial concepts they'll use for the rest of their lives." It's an exciting game where students select a portfolio with the goal of making the most money. According to Andrew DeSouza, media relations manager, the game is played over a 10 - 15 week period and each portfolio must have at least three different securities.

DeSouza noted that the program completed its seventh annual Capitol Hill Challenge, and that three groups won trips to Washington DC to meet their member of Congress. He sent me a link to a study the program sponsored that claims improved math skills and financial literacy result from this game. Others, such as Bloomberg columnist Susan Antilla, question the motive behind the game in Suckers of the Future. The three experiments I conducted in my class may shed some light on what the SMG really teaches.

SMG - Playing by the rules
Colorado College is very selective in admissions and has talented and motivated students. I simulated an off line version of the game where each group was given the task of selecting a portfolio. The prize for the winning group would be an automatic (but imaginary) "A" grade for the course.

Those talented and motivated students soon realized that, much like the real SMG, there was no downside to having a failing portfolio. They tended to select a very small number of extremely volatile stocks. They also recognized that having a slightly above average portfolio wasn't going to make them a winner and get that automatic "A." And having the worst portfolio wasn't going to be any better than having the second best.

To see whether ultra high risk portfolio construction carries out in the actual game, I asked DeSouza if he could disclose the portfolio composition of the Capitol Hill Challenge winners. He declined.

SMG - New game, new rule
The next assignment I gave my students was to select a new portfolio. I actually only changed one rule. Rather than reward the strongest performing portfolio with an imaginary "A," I instead gave out an imaginary "F" to the group that performed the worst. I just reversed one rule, giving a penalty to the losers and nothing to the winners.

As you might imagine, the portfolios the student groups selected looked nothing like the ones they selected previously. Risk taking turned to risk avoidance and short-term government backed securities ruled the day. To say the students didn't like this game as much would be a very large understatement.

As silly as this rule may seem, is it really any sillier than the rules of the actual game with rewards for winning and no penalty for losing?

SMG - Reward and Penalty
Finally, toward the end of the class, I played one last off-line version of the SMG. I told the students that they were gifted $100,000 but they couldn't get it for ten years. In the meantime, they would have to put it into a portfolio of their choosing.

The students came back with something very different than the first two versions of the game. They came back with diversified index funds and low cost mutual funds in different asset classes.

The reason, of course, is that under this off-line version of this game, they received both the downside and the upside consequences of their portfolio selection. They also were investing for the long-term rather than two to three months. In short, they were unwilling to take uncompensated risk.

The SMG - a Lose/Lose Outcome
I'm all for teaching math and financial skills, but by only showing students the winning side of the equation, what the SMG game is actually teaching is nothing more than gambling. If the students do well, they will think that investing is easy and they will make a quick killing for real when they have money. If they do poorly, they will think that investing is hard and that perhaps they should turn their money over to one of many brokerage firms that just happen to be a sponsor of the game.

Postscript - I turned to the expert investors in the Bogleheads Forum to see their thoughts on the SMG. Of the 41 responses, 7 percent believed the SMG taught investing , 58 percent gambling, and 34 percent both. Visit this topic to see their insights.

Author's note: Colorado College is on the Block system meaning that students take only one course at a time, for a four week period. The fact that the SMG couldn't be played as intended in a period less than ten weeks is only relevant if one believes that ten weeks is long-term.

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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.