The Trading Game: A Simple, Easy to Run In-Class Experiment

I was not planning on blogging about this, but an email last week from my colleague Nicholas Magnan telling me he wanted to run the Trading Game — a simple in-class experiment I run with the students in my principles of microeconomics class every year to show them that trade leaves no one worse off — in his own classes and asking me whether I had written anything about this made me realize I should probably share this with other teachers of economics.

Protocol

The Trading Game is pretty simple. Before the start of every semester I have to teach principles of microeconomics, I look at the number of students enrolled in my class, and I head out to the nearest dollar store to buy an equal amounts of trinkets.

As luck would have it, WikiMedia Commons has a picture of the very place in Durham where I buy all of my Trading Game trinkets:

(Source: WikiMedia Commons.)

The trinkets I buy are all in the $1-to-$3 range, and they consist largely of toys. This year’s trinket harvest yielded a Toys (as in the movie) puzzle, glow sticks, Donald Duck stickers, fake tattoos, miniature plastic animals, toy dinosaurs, etc. For a group of 50 student, I usually spend no more than $100 of the allocation I receive for my course.

Then, when I want to run the Trading Game in the wake of teaching students about how trade can make everyone better off in context of chapter 1 of Mankiw’s Principles of Microeconomics, I go around allocating trinkets to students at random.

I then ask students to assign a value to the trinket they have just received ranging from 0 to 10, with higher values meaning cooler trinkets.

We then go around the room recording those values. Because students often bring their laptops to lecture, it is easy to find a volunteer to record those values, but you can have a teaching assistant do it. Once all values are recorded, total welfare (i.e., the sum total of the values students assign to their trinkets) is announced.

I then tell students that they have five minutes to trade voluntarily between themselves, insisting on the fact that trades must be voluntary (i.e., no stealing) and cannot involve dynamic aspects, or credit (i.e., no “I’ll give you my cool dinosaur if you give me your awful trinket and you buy drinks on Friday night.”)

Once students are done trading, we once again go around the room recording the values they assign to their trinkets. Once all values are recorded, total welfare is announced once again.

And that’s usually where the magic happens. When I ran the Trading Game last week, my class’ “aggregate welfare” went from 128 to about 180, if I recall correctly, and you could just see that it had become obvious to students that (in this context of well enforced property rights) trade not only left no one worse off, but it increased aggregate welfare.

If I’d wanted to do things more convincingly, I would’ve asked the student who recorded values in a spreadsheet to test whether the two values were statistically different from one another.

I cannot take credit for the Trading Game, as I first learned about it in 1999, when I played it at a colloquium for student leaders organized by a Canadian free-market think-tank (yes, those actually exist).

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23 comments

  1. Jean-François Godbout

    This is pretty cool, considering you learned this from the Canadian equivalent of the Enterprise Institute…

  2. Arthur Doohan

    No…that just describes either inflation or indebtedness….since they had no extra ‘tokens’ at the end of the process…

    plus a single iteration of the exercise does nothing to illuminate the random nature of the winners or losers from the ‘trading’ process….

  3. Marc F. Bellemare

    You’re coming at it from a position that assumes that there is an objective value to things. There isn’t. It’s all based on the value people subjectively derive from things. Once some people get something they want more than what they initially got and others are left with what they initially had, you have increased welfare.

    There are also no debts being contracted here; there is no inflation, because there is no currency to be debased. And trades were not random (though I will grant you the initial assignment of trinket endowments was…)

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  5. Jay Hancock

    Hi Marc: I played the game at an economics boot camp for journalists in 1996. Jim Charkins, at the California Council on Economic Education, did the honors. I emailed Jim about the game’s origin. This was his response: “The game has been around FOREVER. I first saw it done in Indiana in 1982. I added a bit to it, as have many others. The game has evolved through the decades. Today it is used by almost every economics educator worth his/her salt. I would love to claim authorship, but I’m afraid that belongs to many folks dead and alive. So ‘unknown’ is definitely appropriate although it was certainly before 1999.”

  6. Justin Tapp

    I played the trading game with all of my Principles of Micro classes, except I used a few pieces of candy instead of trinkets (cheaper that way). I didn’t record aggregate values, I just had students record before and after the trade how much they’d value their candy in dollars and asked if anyone saw their value go down (hopefully no one.)

  7. Francis

    I like it and I believe that such games have huge learning potential. Do you have multiple copies of certain trinkets to create competition between providers? I’d be curious to see what happens to some suppliers of common goods (e.g. exportable labor in the real world). To illustrate international trade, you could run the test twice: once with 3-4 subgroups (with no more than 1 copy of each trinket), once with the entire group. It might even start to illustrate the distributional impact of trade. Or if you already bring multiple copies, what have you observed in terms of competition?

  8. David

    How would you integrate statistical significance? It appears you are taking a census of values, so there would be no sampling error, could you describe what you mean by “statistically different”?

  9. Marc F. Bellemare

    If you treat the class as the population, you’re right that it’s a census. I was treating the class itself more as a sample of the population outside the classroom (a highly selected one, of course), in which case you can construct a confidence interval around the pre- and post-trading estimates of the mean.

  10. Marc F. Bellemare

    Cool suggestion on the international trade one, especially since the first difficult thing I have to teach in this course is absolute vs. comparative advantage. I try to buy two of each trinket, though that’s purely because Dollar General does not sell as many trinkets as the number of students in my class, I don’t think.

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  12. K Zhang

    Because the game is so simple, it would be very easy for lay people to make a conclusion that “trade makes everybody better off”. I think this is not the right conclusion to make, and this question is tied to the public debate on the benefit of free market.

    Using the game’s rules, we see that nobody’s welfare will decrease (because a trade cannot happen if it does), and the total welfare will go up. But if we try to make a more realistic rule, you will see that while the total welfare may go up, it’s no longer guaranteed that everybody will be better off. Imagine that one of the students decides that instead of getting a trinket he wants, he trades for a trinket he thinks other people likes, but he didn’t like. So he will first make a trade that, on a strict level, decreases his welfare, with the expectation to earn it back later. Even if he’s right, it is no longer true that the welfare always increases after every trade. The reason that this scenario is more realistic, because no one in the society makes things strictly for his own consumption. Everyone makes things expecting to trade with other people. And when the expectations are off, people lose. American manufacturers made investments expecting to trade with American consumers. Workers made investments in skills expecting to trade with American manufacturers. When the American consumers chose to trade with Chinese manufacturers, some people are worse off from this trade. People don’t have a choice whether to be exposed to these risks, they have to be exposed to some kind of risk. Most often, the winners and losers are chosen randomly, as no one can foresee the future. The free market principle ignores this, and ignores that sometimes people lose due to nothing but luck. The case for progressivism would be for the government to step in and mitigate that risk. Regardless of whether you agree, it’s important to note that the answer is not simple.

  13. Andre de Cavaignac

    That’s clever.

    I would suspect that equality had also increased, as more people have been left with the goods they wanted (and will assign a higher value to) over goods they valued lowly.

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  15. michael langford

    If only trade in the real world worked that way, without subsidies or regulation or intervention, or outright chicanery. It doesn’t. And I’m not one of those damnfool Libertarians, either. There’s an old English novel called “The Ragged Trousered Philanthropists” that has a similar game called “The Great Money Trick” which demonstrates the relationship between Capital and Labor. Capital stacks the deck and Capital wins. Hands down. Try it, economist.

  16. Nick Magnan

    I used this game in my undergraduate natural resource economics class after learning about it from Marc. I can’t spend university money on things the students keep, and I have a class of 50, so I had the students bring in a “trinket” from around the house with an approximate market value of under $5. The students brought in a wide range of stuff, and it all went in a big box. At the beginning of the game, everyone received a random trinket from the box. I had them assign a utility value to their trinket from 0-10. Then I divided the class into 2 groups, and let them trade with whomever they wanted in either group for 3 minutes. After they were done trading, the aggregate utility of each group went up. I explained that this was a Pareto improvement. I then asked them to compare the increase in utility between the two groups to see who benefited most from trade, and then explained how utility is ordinal and not cardinal, so it not directly comparable.

    Before the next round of trade I had them wrote down their willingness to pay for their good (we learned WTP in a previous class, not WTA), and added up aggregate WTP for each group. Then I had them trade again, but changed the rules to let one group dictate the terms of trade; members of the other group had to accept whatever deal was proposed. After this round of “trade” they wrote down their new utilities, and their new WTP. The aggregate utility for one group was much lower than the other, of course, and the decrease for the plundered was about the same as the increase for the plunderers. But the increase in aggregate WTP for the plunderers was much greater than the decrease in aggregate WTP for the plundered! This outcome was a nice surprise because it demonstrated a potential Pareto improvement. This result led into to a good discussion on efficiency, equity, and ethics, which are underlying themes for the class. They seemed to really like the game- even those that lost the good trinkets. Thanks again for the idea.

  17. Kevin

    How is it possible to show students that trade leaves no-one worse off when that’s empirically not the case? This is exactly the sort of “textbook neoclassical economics” that assumes away “risk and uncertainty, market power, externalities, asymmetric information, transaction costs,” that you discuss in your blog post ‘How Much Economics Should You Take?’ (http://marcfbellemare.com/wordpress/2012/01/how-much-economics-should-you-take-in-college/). Yes, trade CAN make everyone better off, under certain naive conditions, but it can also make some people much worse off, particularly in light of non-tariff barriers to trade. That’s not to say trade is always bad, but the proviso usually applied in principle-based discussions of economics—that at least some of the gains of trade are redistributed to those who will be worse off—almost never happens in reality.

  18. Marc F. Bellemare

    It’s an intro course. I do teach some market power, some externalities, etc. later on in the semester, but you’ve got to start somewhere. And by and large, trade does make people better off when people trade voluntarily, when property rights are well enforced, etc. If it weren’t the case, you’d observe very little market activity the world over at any given time. The idea is to get students to understand that markets can increase welfare (though I spend a good bit of time in class saying that there exist real constrains to that happening in the real world).

    Redistribution is an entirely different ball game which my students don’t get to hear about until the second required econ course they take at the Sanford School, which centers around public economics.

  19. ezra abrams

    but..you started off from a random distribution, which (i think) doesn’t occur.
    That is, you don’t start with people who have stuff they don’t want (why did they buy it in the first place)
    You can have people making stuff for sale that they don’t want, but that seems different.
    to put it another way, if each student has some value for each trinket, and you randomly assign trinkets, what is the probability that you will be near the optimum ? I’m guessing for 50 or so students, it won’t happen in the age of the universe

  20. Marc F. Bellemare

    Fair enough. Two things, however:

    1. People start out in real life with random endowments of “stuff” (no one picks where and in which family they are born), some of which they don’t want and trade for stuff they do want, and
    2. You are right that if the “optimum” (which I presume you define as the maximum of all possible aggregate welfare values) happens, it is purely out of luck. But then again, the idea is not to attain some idealized optimum but just to show that trade can, in principle, make everyone better off in our stylized economy (and brings us closer to the idealized optimum by so doing).