Wednesday, April 27, 2011

Ethical Dilemma

Can you “teach ethics?”  I don’t know.  But I do know that we can teach about the economic and social consequences of unethical behavior and challenge students to think through how they themselves would behave when faced with a dilemma.  At FTS, we have devised trading simulations that use experiential learning to focus on individual decisions involving unethical behavior, the relationship to social norms, and the impact of such behavior on social outcomes. 
We do this by letting students trade stocks in a specially designed market simulation.   The market setting provides a unique way for students to not only face ethical dilemmas but to go beyond that and evaluate the implications of unethical behavior by individuals and groups for society.  In the exercise, a subset of market participants is provided with early information on the earnings of a firm. They have the option of accepting the information or declining it. The information is always correct, and if they accept it, it can help them trade and potentially make far greater profits than if they declined it. It is known that the information was not supposed to be leaked; whether it is illegal to accept the information is left ambiguous, but it is fairly clear that accepting it would be considered unethical behavior by most.

Monday, April 25, 2011

Executive Session

One requirement that comes up frequently is the use of our real time system in executive education or other short-duration courses.  The problem is that the participants will only be there for a short while, perhaps only for a couple of hours, so a daily marking to market is not useful.   A second problem is that markets may be closed during the time of the course, say on a Saturday or in the evening.  So what do we do?

Monday, April 18, 2011

After Hours

Did you know that the NYSE conducts a pre-opening auction at 4 am?  And that on the four largest US exchanges (the third and fourth are BATS and DirectEdge) the trading day is basically 8 am to 8 pm?  The reason for bringing this up is that a student on our real time system executed a trade after hours at a price different from the 4 pm close, and asked about why this may be the case.  On FTS, you can trade outside “normal” market hours at whatever quotes are available at that time (unless an instructor requests otherwise). 
We believe allowing such trade has serious advantages.  These stem from two sources. 

Wednesday, April 6, 2011

Baskets of Eggs: Risk, Return and Diversification

Interactive tools can make really dry material, like portfolio theory, come alive. When I first started teaching, without such tools, I used to dread this part of the course. Now its fun, and here is what I do.

I start with historical stock data on a few stocks. If you don’t have access to current data, you can download it from financial web sites, like Yahoo finance. Step 1 is to show the students what recent returns have looked like, for stocks, for the index, and for some simple (e.g. equally weighted) portfolios using the Efficient Portfolio module. The following picture will give you an idea of what we discuss:

The example uses:

Tuesday, April 5, 2011

Mind the Gap

A quote attributed to Yogi Berra (and others) says:
"In theory there is no difference between theory and practice.
In practice there is."
The primary goal of interactive learning tools, like trading simulations, is to bridge this difference and let students learn not only what the concept is, but also to learn to apply it and then understand whether or not it  works in practice.

At FTS, we take a specific 3-step approach to this and provide the necessary tools.  The steps are:
1. THEORY: typically taught by the instructor and covered in textbooks
2. APPLICATION: simple calculations and application to historical or current data
3. PRACTICE: the application going forward in time and using the concept to make actual decisions.

The third step is where the gap is ultimately bridged: if you can understand how to use the tool then you have a real, practical understanding of the concept.  

As an example, take the concept of duration, taught in most introductory finance and investments courses.