Teaching experiments

The owner of an American call option watches the stock price rise as the expiry date approaches and decides when to exercise or sell the option. Repeat play gives students an understanding of the fair market price for the option and shows that there is no benefit in exercising early.

Sellers compete on price and learn that Bertrand competition drives prices down to marginal cost unless there are only a handful of sellers and opportunities for collusion. The reverse is true when a monopoly is split in two and the consumer ends up paying higher prices.

Investors attack currencies and depending upon the parameters reach different equilibria: everyone attacks if it is profitable for only a few investors to attack, whereas no one attacks if many investors are required for a profitable attack.

Small investors panic and lose money in a bank run because the bank has insufficient liquidity to pay them all at the same time.

A buyer is unwilling to make an investment that would be useful only in conjunction with a single supplier because of a fear that the supplier will demand a share of the profits from the investment.

A consumer and an insurance company both have positive utility from insuring the consumer against a 50% risk of a bad outcome, provided neither of them knows the outcome in advance. If the consumer does know, the asymmetric information leads to the collapse of the market because only the consumers with the bad outcome will buy (adverse selection).

Traders in a barter economy suffer a double coincidence of wants problem, which is solved when the good with the lowest storage cost emerges as a common medium of exchange, i.e. money.

An optimistic buyer, who values an object more than its owner but knows less about its quality, finds out through repeat play that he or she is in a market for lemons and would be better off not to buy at all.

Paradox in probability where the disclosure of some apparently irrelevant information causes the relative likelihood of two events to change from 1:1 to 2:1.

Consumers with different private valuations enter a market with positive externality, where the value of the commodity to each is increasing in the number of others who buy it; the predicted equilibrium is reached where consumers buy when their private valuations exceed a common threshold.

A supplier learns by repeated play how to extract the most profit from two buyers with known valuations when different forms of price discrimination are allowed.

Team captains in a sports draft who naively pick their most preferred players end up with a weaker team than those who anticipate the choices of others.

Stock market investors find out that a single fund with a high mean return is a risky investment if it also has a high variance; paradoxically, a diversified portfolio containing this fund is a good investment.