The file you are about to see and hear is from a market experiment I conducted in Caltech’s Laboratory for Experimental Economics and Political Science. The subjects are Caltech students all of which are experience in the operations of the compute rized market used in the laboratory to facilitate real time trading.

The animation you will see is substantially speeded from real time (about 1.5 hours of data played back in less than 2 minutes). The dollar values, in Cents, are shown on the vertical and time, in seconds, takes place on the horizontal. The green dots are asks to sell, the higher the dot the higher the ask. The blue dots are bids to buy and the turquoise dots are actual trades. From time to time you will see a trade at zero. Typically, at the first of the exercise, these are typos about which participa nts get very upset because of the money lost.

The instruments traded are securities with a fifteen period life. Each period the securities pay a dividend that is randomly determined from the set

{0, $0.08, $0.28, $0.60}. The expected dividend per period is $0.26 so with a 15 period life each security begins with a fundamental value of $3.60 and a maximum possible value of $9.00 should it return the maximum dividend of $0.60 every period of its life ?a very unlikely event. As time goes and periods end as shown by vertical lines, the payment of the dividends leaves fewer remaining for the future so the fundamental value drops as is shown by the vertical line. At the end an instrument pays nothin g and is worth nothing. These facts are all well known to the participants.