Earn Rewards: Sign up now and earn a special reward after your first deposit. See offer details

Now available: New and improved Socially Responsible Investing portfolios. Learn more

<title>Dismiss</title>

Betterment

Save, invest, retire

GET — On the App Store

View
<title>Dismiss</title>
Loading

Predictably Irrational Behavior

Our stock market experiment results are in. The experiment began with the introduction of a single-stock market. We offered one stock – called FOO – an imaginary up-and-coming tech company.

Articles by Betterment Editors
By the Editorial Staff Betterment Resource Center Published Aug. 18, 2011
Published Aug. 18, 2011
2 min read
The rules

– Everyone starts with $2,000 and 10 shares of FOO.

–  FOO produces (randomly generated) dividends between $0 and $20 each round, averaging $10 per round.

–  With a total of 15 rounds, a share should be worth $150 (15 rounds x $10).

–  As the experiment continues, the stock should be worth less and less – $140 at round 2, $130 at round 3, and $0 at the end.

The game

Round 1 started off slowly, with shares being sold at prices well below their value (Kiran freaked out and sold a share worth $150 for only $18) but as the rounds progressed, the value of the shares began to grow.

By round 3, FOO reached its peak price of $121 per share, just as people began to realize what it was really worth. Those who understood attempted to buy the shares for slightly less than their value, in the hopes that unprepared employees (a.k.a. the software coders) would allow them to buy low and collect the dividends.

Once the trend shifted to buying, share prices rose above their expected value. This is the type of irrational behavior that would normally create a bubble – who pays $95 for a share worth $70?!

The Betterment team, however, was too smart (or too flustered – take your pick) to let the bubble grow.  Share prices gradually returned to their expected value, avoiding the “pop” (rapid decrease in price) one usually associates with a bubble.

The results

While some lost money, and some gained, one thing became clear: no matter how smart you think you are, trying to out-smart the market is near impossible. People are predictably irrational. It’s better to set it and forget it.

No surprises that our CEO Jon Stein won the game, with a neat total of $4398.

The above results come from an in-office experiment conducted by Betterment intern Sarah Brock. Thanks Sarah!

 

Recommended Content

View All Resources

Betterment Checking

Betterment Checking is our mobile-first checking account and debit card for your daily spending.

Goal-Based Investing: A Decade In Review

As we all look forward to and plan for the future, let’s stop and take a look at the past decade to see what we can learn from it.

High-Yield Savings Accounts: The Ultimate Guide

High-yield savings accounts can offer higher interest rates than traditional counterparts. Learn everything you need to know about them in this guide.

How would you like to get started?

Manage spending with Checking

Checking with a Visa® debit card for your daily spending.

Save cash and earn interest

Grow your cash savings for general use for upcoming expenses.

Invest for a long-term goal

Build wealth or plan for your next big purchase.

Invest for retirement

Set up traditional, Roth, or SEP IRAs to save for the golden years.

See details and disclosure for Betterment's articles and FAQs.