Last post on Mar 08, 2008 at 12:09 AM
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Automotive News, Future Vehicle
#1 of 1 Rethinking price and reward
Mar 08, 2008 (12:09 am)
Some additional ideas here that I thought I'd throw out...
Based upon price and trading trends, it certainly seems that the current pricing methodology has some major challenges going forward.
Obviously the prices currently are not impacted by any real world sales trends, they are impacted by new players joining the game and unknowingly making poor choices by buying stocks that are way over-priced, which then turns into profit-taking by the experienced traders.
One issue is that $1,000,000 to start was probably too much money. If everyone had gotten $100,000 instead we'd probably be much closer to the proper valuations of these stocks, although we still wouldn't be operating on correct incentives for purchasing & selling.
The layperson joining the game is not going to have any idea about whether any particular 6-month sales volumes are accurate appraisals. And the experienced traders don't care because they're only looking for a quick buck anyway.
The high-volume traders can be somewhat marginalized by making systematic modifications to the trading system, limiting trades per stock, etc. But you can't expect to instantly educate a layperson on whether a stock is valued properly based upon some sort of tie to 6-month sales figures which mean essentially nothing to them.
So what do these lay persons do now? Well, from what it seems like, they log in for the first time and buy the stock of cars they like. In and of itself, this is a good thing, this is the expression of interest/perception/demand that can give Edmunds an idea for how people feel about a particular vehicle. But the problem is that because all these cars have different 6-month sales estimates, the baseline equilibrium level for each is totally different. $20 on the IS-F is still a high price in comparison to the 6-month sales estimate, but for the Pilot it's really low. So it's almost as if each of these stocks is being judged on a different scale. Ideally the pricing system could equalize this and make it easier for players to pick one car versus another.
Well so my idea for this is as follows:
All stocks IPO at $100. Instead of $100 corresponding to any absolute sales figure, instead think of this as a baseline for an index. And that baseline corresponds to Edmunds forecast for 6-month sales. Therefore, people log in, they buy the stock for the cars they like, and sell/short stock on those they think will stink. Only instead of having to figure out what stock price is low and which is high, it's obvious because they are all on the same starting scale of $100. Edmunds can then use this information to determine if their sales estimate is low or high. The higher above $100 a stock gets, the more positive the interest and demand is for it, potentially resulting in a predictive capacity. Conversely, if a stock drops well below $100 it would indicate a negative perception and perhaps weaker demand.
Also, starting these stocks out with an artificially stronger book at the initial $100 level so they are less prone to big movements would be ideal, trades are simply impacting prices too much currently.
The next major issue is that currently for the people who correctly estimate excess or deficient demand in respect to the Edmunds 6-months sales prediction there really is no reward. While the monthly rewards could stay in place simply to encourage participation, there should also be end rewards, not for a time period but instead for each vehicle. At the date when a vehicle is retired and the actual 6-month sales figures are known, the user whose trades most accurately bracketed the margin above or below the baseline estimate would win the prize for that vehicle. The calculations for most accurate trader would look over the entire lifetime of the vehicle from IPO to retirement.