Investing In Anything That Moves

In Grade 12 Economics, we did a stock market simulation. 5 teams, and five brokers. The teams had money, and the brokers made recommendations for trades on which we'd make a 5% commission. The sim ran for 10 days.

I was a broker, and it occurred to me early on that investing on that short of a timeframe is a bit of a crapshoot. A blue-chip, while a smart call for long-term stability, is exhibiting wildly uncharacteristic behaviour if if moves 10% in two weeks. I was making money on the amount of money that moved, and so I had an incentive to get as much money as possible moving every single day. I'd come to class every morning with a bucket of companies to invest in, and I'd push every team to dump and re-buy as much as possible. I wasn't particularly good, but I came across as confident, I got lucky on a few picks, and my clients mostly made money so they stuck with me.

The simulation was imbalanced - all the brokers came out ahead relative to the teams, who mostly lost. Sitting on the money and making no trades would've got you 2nd place. And I won, because I saw what led to me making money, and I pursued that. The threat of a losing trade was minimal beyond the risk to my reputation, and in the case of a loss, well, sell it all off, it's clearly a lost cause and you should buy this instead. I get 5% on both sale and purchase. I won on volume, not talent.

A better educated society is a more prosperous society, that pays more taxes on average leading to better social programs... done right, it's a virtuous circle. Higher education, when the outcome is a better-off grad, is a smart investment for a society to make. But I'm not sure the incentives are right to ensure that those investments are made intelligently. A history major who becomes a well-off sales exec earns as much for a university as an anthropology grad who works at Starbucks. A university can secure 20k in student loans and 40k in government funding with a penstroke by sending out one more offer of admission. Both the student and the province share in the risk on that investment, but if it goes sour the university isn't out a dime. Why wouldn't they lower admission standards, or pressure high school principals and guidance counsellors to inflate grades so they look like they're sending a high percentage of students to university? That looks awesome and makes you feel great, right? Even if they're barely literate, they're paying, and the province is paying, and there's no downside because there's no accountability. Universities are the brokers making money on volume, while students and taxpayers are the teams that have to deal with the fallout if it doesn't pan out as hoped.

I don't mean to suggest an evil conspiracy. But I do think that the current system of checks, balances, and incentives has some pretty bad unintended consequences for our economy. Tim Hudak has proposed tying student loans to in-class performance, as if the current amount they spend or borrow is insufficient skin in the game. Given the current imbalance, I'd much rather see attempts to tie University funding to the return their students provide on the investment the province makes in them. It'd make a hell of an experiment.

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