Economic Classroom Experiments/The Wallet Game
Economic Classroom Experiments/The Wallet Game  

Designer  Origninated by Todd Kaplan 
Designed  2007 
Topic  Auction 
Organisation  Wikiversity 
No. of roles/players  9  60+ 
Archive of Simulations and Games for the Enhancement of the Learning Experience The individual resources in this archive come from diverse sources. They have been brought together into this archive in a project supported by  
Hand Run VersionEdit
Students bid for an object in a firstprice auction. Each receives an independently drawn signal of the value of the object. The actual value is the sum of the signal.
OverviewEdit
Objectives for learning (Intended Learning Outcomes)Edit
 Strengthening understanding of rules behind firstprice auction.
 Concept of common value auction but private information about value.
 Intuition behind Bayes’ Rule. (Given that you win, the value of the others’ signals are lower.)
 Understand of the Winner’s curse.
Suitable modules.Edit
Financial Markets and Decisions, Advanced/MSc Micro.
Level (year of programme):Edit
Third year or MSc or MBA.
Prerequisite knowledge:Edit
Knowledge of first price auctions.
Procedures/tips for instructorsEdit
Divide students in three groups (or how many bidders you want). Give the students index cards with randomly drawn signals [0,10] written on them. (You can get these from random numbers excel file.) Write their group (A,B or C) on the card for them (they may forget). Have them write their bids on the cards. Collect the cards and show bids, signals on the board. Determine winner and profit of the winner. Repeat one or two times.
Tip. You may want to write 4 numbers per card and randomly choose one to count. Worthwhile to write all 4 bids on the board and chose the one that counts after all numbers are displayed. (The random selection process can be done by flipping a coin twice (HH is 1, HT is 2, TH is 3, TT is 4) or writing the numbers 1 to 4 on the slips of paper and have one student select the winner.
Tip. For excitement you can pay (or get paid) for the winner. Use a conversion such as winnings are divided by 10 and given in pounds.
Tip. Group sizes should not be larger than 3 to 4 students. For larger classes, either increase the number of groups in the game or randomly select a subset of groups that count in the experiment. For instance if the class size is 60, you can have 20 groups of 3 and select 4 of these 20 groups to count (writing the bids on the board and the value is the sum of only these 4 groups).
The equilibrium bidding is described by (see slides for derivation). For N=2, this is just b=V.
Topics/questions for class discussionEdit
Can be described as a takeover battles where bidder 1 knows the value of one of the target's divisions and bidder 2 knows the value of the other division.
Myopia would have one think the value is and bid times this equals . Actual expected value is . Another possibility is that expect everyone else’s signal to be ½ times highest possible signal. Then using the above analysis expected value is Hence, in both cases there could be a winner’s curse.
As N increases, your information becomes less useful, however, the competition becomes fiercer. If true value were average of the signals (rather than sum), then a graph of bid/V vs. N looks like.
The above graph shows that competition increases bids for smaller N, Winner’s curse hurts bids more for higher N.
What happens when N is large? Your bid approaches the expected value of the object if you win.
Instructions for students.Edit
 You know how much money is in your wallet.
 You do not know how much money is in the wallet of others.
 Each wallet has money is drawn uniformly on [0,10].
 We will run a firstprice auction on the sum of three wallets (including yours).
also see slides.
Results and feedback:Edit
Most groups bid , i.e., overbidding for all signals but particularly for low signals.
Computerized ExperimentEdit
Students bid for an object in a firstprice auction. Each receives an independently drawn signal of the value of the object. The actual value is the average of the signals.
ProcedureEdit
This experiment is run on Charlie Holt’s website. See tip sheet for his website.
For an introduction see http://veconlab.econ.virginia.edu/cv/cv.php
To set up a session http://veconlab.econ.virginia.edu/cv/cv_admin_login.php
The equilibrium bidding is described by (see slides for derivation). For , this is just .
Results of ComputerizedEdit
Further reading:Edit
 Auctions with Almost Common Values: The "Wallet Game" and its Applications European Economic Review, 1998. Paul Klemperer. http://www.nuff.ox.ac.uk/economics/papers/1998/w3/wallwebb.pdf
 Ch. 21 of Webgames and Strategy: Recipes for Interactive Learning, Charles Holt, forthcoming, AddisonWesley, 2006.
 Holt and Sherman (2000), ""Risk Aversion and the Winner's Curse,"," Working Paper, University of Virginia. http://www.people.virginia.edu/~cah2k/wincurse.pdf
Topics in Economic Classroom Experiments  
Auctions 

Markets 

Public Economics 

Industrial Organization 

Macroeconomics and Finance 

Game Theory 

Individual Decisions 

This page was first created by Toddkaplan 10:07, 9 April 2007 (UTC)